UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   -----------

                                    FORM 10-K
                Annual Report Pursuant to Section 13 or 15(d) of
                      the Securities Exchange Act of 1934

     For the Fiscal Year Ended December 31, 1998 Commission File No. 0-19301
                                   -----------

                     Communication Intelligence Corporation
             (Exact name of registrant as specified in its charter)

          Delaware                                       94-2790442
  (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                     Identification No.)

  275 Shoreline Drive, Suite 500
    Redwood Shores, California            (650) 802-7888
 (Address of principal executive      (Registrant's telephone           94065
              offices)              number, including area code)     (Zip Code)

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                                (Title of Class)

        Indicate by check mark whether the  registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

Yes X   No    

        Indicate by check mark if disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  into  Part III of this Form 10-K or any
amendment to this Form 10-K. 

        The aggregate  market value of the voting stock  (Common  Stock) held by
non-affiliates  of  the  registrant  as of  March  29,  1999  was  approximately
$131,803,421  based on the closing sale price of $1.93 on such date, as reported
by the Nasdaq SmallCap Market.

        Indicate by check mark whether the  registrant  has filed all  documents
and reports  required  to be filed by Section 12, 13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

Yes X   No    

                         The number of shares of Common Stock  outstanding as of
March 29, 1999 was 79,413,954.

                               A list of Exhibits to this Annual  Report on Form
10-K begins on page 31.


<PAGE>



                     COMMUNICATION INTELLIGENCE CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                TABLE OF CONTENTS


                                                                           Page

PART I...............................................................        3
Item 1. Business.....................................................        3
Item 2. Properties...................................................       11
Item 3. Legal Proceedings............................................       11
Item 4. Submission of Matters to a Vote of Security Holders..........       11
PART II..............................................................       12
Item 5. Market For Registrant's Common Equity and Related
        Stockholder Matters..........................................       12
Item 6. Selected Financial Data......................................       13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................       14
Item 8. Financial Statements and Supplementary Data..................       21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................       21
PART III.............................................................       22
Item 10. Directors and Executive Officers of the Registrant..........       22
Item 11. Executive Compensation......................................       24
Item 12. Security Ownership of Certain Beneficial Owners and 
         Management..................................................       26
Item 13. Certain Relationships and Related Transactions..............       27
PART IV..............................................................       28
Item 14. Exhibits, Financial Statement Schedules,
         and Reports on Form 8-K.....................................       29

-----------

*        CIC(R)  and its  logo,  Handwriter(R),  Jot(R),  and  INKshrINK(R)  are
         registered  trademarks  of  the  Company.  CIC  Speller(TM),   HRS(TM),
         InkTools(TM),  PenX(TM),  QuickNotes(TM) and Sign-it(TM) are trademarks
         of the Company. Applications for registration of various trademarks are
         pending in the United States, France,  Germany, Italy, Japan, Spain and
         the United  Kingdom.  The Company  intends to register  its  trademarks
         generally  in those  jurisdictions  where its  products  are or will be
         marketed in the foreseeable future.

                                       2
<PAGE>


                                     PART I

Item 1. Business

General

     Communication  Intelligence  Corporation  (the  "Company"  or  "CIC")  is a
leading  supplier of pen enabling  software  solutions.  CIC is headquartered in
Redwood Shores, California and has a joint venture,  Communication  Intelligence
Computer Corporation, Ltd. ("CICC" or the "Joint Venture"), in Nanjing, China.

     The Company's core software  technologies include multilingual  handwriting
recognition systems (Jot(R) and the Handwriter(R)  Recognition System,  referred
to as HRS(TM)),  dynamic signature  verification and capture tools (InkTools(TM)
and Sign-it(TM)), ink compression (INKshrINK(R)) and operating system extensions
that  enable  pen  input  (PenX(TM)).  Other  consumer  and  original  equipment
manufacturer ("OEM") products include electronic notetaking (QuickNotes(TM)) and
spell  checking  utilities  (CIC  Speller(TM)).  CIC's  products are designed to
increase  the ease of use,  functionality  and  security of  electronic  devices
ranging from PC peripherals to cellular phones.

     CIC is a technology  leader in the growing market for pen enabling software
solutions.  In 1998, industry leaders such as Microsoft,  Ericsson,  Fujitsu and
Compaq chose to bundle CIC  technologies.  The Company  currently  has licensing
agreements  with more than twenty  hardware  and  software  companies.  See "OEM
Revenues".

     In the 4th  quarter  of  1997,  CIC's  newly  hired  President,  Mr.  Guido
DiGregorio,  developed and implemented a  comprehensive  plan that leveraged key
CIC  technologies  and  focused  on  specific  market  opportunities  with  both
near-term  sales and significant  growth  potential.  The plan included  actions
which have reduced  operating  costs and expenses  (excluding  cost of sales) to
approximately $6 million for 1998, 50% of 1997 levels, by focusing  primarily on
software  products.  This  "software  only"  strategy  enabled  the  Company  to
eliminate  expenses  related  to  hardware  products  and  direct  retail  sales
including  the  sales  force,  advertising,  sales  promotions,   manufacturing,
distribution, inventory and customer support.

The   Company's  new  business   strategy   involves  a   three-pronged   thrust
domestically:

o    Accelerate  the growth of license  revenue  derived from software  products
     through Handheld PC, smart cellular phone and PC peripheral OEMs.

o  Accelerate  the  sale of  aftermarket  consumer  software  offerings  via the
Company's website and selected on-line resellers.

o    Establish  sustainable  enterprise  related sales growth by leveraging  CIC
     technologies  which  enable  server-side  pen  solutions  within the Citrix
     thin-client environment.

OEM Revenues

    The Company's overall OEM revenues in 1998 (new sales versus the recognition
of past years' deferred revenue) almost doubled as compared to 1997. This growth
reflects  increased revenues to existing vertical market customers by leveraging
existing  and newly  introduced  products  (see  list of  licensees  below)  and
breakthrough  sales to  Handheld  PC  ("H/PC")  and  smart  cellular  phone  OEM
manufacturers. A key event in 1998 was the consummation of a licensing agreement
with  Ericsson  Mobile  Communications  AB  ("Ericsson")  including an order for
$782,000  with an initial  payment of  $641,000,  which was  received in January
1999.  The order covers  non-recurring  engineering  and advanced  royalties for
porting several CIC products to two smart cellular phone reference  designs that
are expected to be  announced  in the first half of 1999.  The revenue from this
order is expected to be recognized in 1999.  Once the porting of these  products
to the EPOC  operating  system is completed,  the Company  intends to make these
products  available  to other  members  of the  newly  formed  Symbian  alliance
(Symbian member companies include:  Ericsson,  Motorola,  Nokia, and Psion). The
wireless  information  device  market is expected to be between 40 to 60 million
devices by the end of 2002. (data source: Ericsson,  Dataquest and Symbian). The
Company believes that  significant

                                       3
<PAGE>

  royalty revenues from this agreement will be
generated beyond 1999 based on industry forecasted smart phone shipments.

Key OEM licensing customers at December 31, 1998 include:

    Licensee           Product(s) licensed        Application of product
----------------     ------------------------    -------------------------

     Compaq           CIC Speller(TM) &            Handheld PC
                      QuickNotes(TM)
     Casio            Jot(R) & QuickNotes(TM)      Handheld PC
     Ericsson         Jot(R), QuickNotes(TM) &     Smart Cellular Phone
                      Sign-it(TM)
     Fujitsu          HRS(TM)& PenX(TM)            Various Pen Computers
     Hitachi          CIC Speller(TM)              Handheld PC
     Intermec         HRS(TM)                      Windows Pen Computers
     Microsoft        Jot(R)                       Palm-size PC operating system
     Mitsubishi       HRS(TM)                      Windows Pen Computers
     NEC/Philips      QuickNotes(TM)               Windows Pen Computers
     Nortel           Jot(R)& INKshrINK(R)         Smart Cellular Phone
     Symbol           HRS(TM)                      Windows Pen Computers

Aftermarket Consumer Sales

     Consumer sales of the Company's software sold over the internet,  primarily
via CIC's  website,  increased  approximately  850% in 1998  versus  1997,  from
$36,000 in 1997 to $341,000 in 1998.  The majority of this increase  occurred in
the fourth quarter of 1998. This growth reflects rapid and effective  porting of
Jot(R) and  QuickNotes(TM)  to the Palm(TM)  operating system (which runs on the
Palm(TM) III & PalmPilot(TM)  handheld organizers) coupled with the creation and
successful   implementation  of  direct  mail  and  e-mail  campaigns,   pricing
promotions,  and website  enhancements.  This effort  included  the build-up and
structuring of a viable Electronic Software  Distribution ("ESD") system as well
as the completion of distribution  agreements with several on-line resellers.  A
list of on-line resellers used at December 31, 1998 includes:

                Digital River.com            Beyond.com
                Mobilesoft.com               Downloadwarehouse.com
                Releasesoft.com              Egghead.com
                Mobileplanet.com             SoftwareBuyLine.com
                Techwave.com                 CompuServ.com
                Pilotgear.com

     CIC  believes  that it will  continue  to  generate  meaningful  growth  in
aftermarket  consumer  sales in 1999 and beyond  based on the large and  growing
installed base of handheld  organizers  presently  estimated at over 2.6 million
units  and  projected  to  more  than  double  by  the  end  of  1999.  (Source:
Dataquest/IDC)

Enterprise Sales

     The Company believes that the introduction of CIC's 32-bit PenX v. 1.5, pen
extensions  for Windows(R) in 1998,  and the  positioning of this  technology as
"enabling" our software products to function on Citrix's  Independent  Computing
Architecture  ("ICA") together with the customer related  accomplishments of the
past several months represents significant revenue potential in 1999 and beyond.
Through this technology, users of Windows(R) based pen computers, Windows(R) CE,
DOS and other handheld  devices are able to access the same pen enabled  program
regardless of operating system. Several products specific to major OEMs have now
been completed and shipped allowing  participation in "show case"  installations
which the Company  believes will result in meaningful  sales through both client
and server-side licensing opportunities in 1999.

                                       4
<PAGE>

China

     The Company owns 90% of the Joint Venture in the People's Republic of China
(the  "PRC").  CICC was  formed to  respond  to the large  potential  market for
pen-computing software in the PRC, particularly Chinese handwriting recognition.
Since the Chinese  language has over 7,000 written  characters,  it is extremely
difficult and  inefficient  to perform  computer  input with a keyboard.  CICC's
Chinese handwriting  recognition software allows characters to be entered into a
computer with an  electronic  pen,  naturally  and easily.  CICC's 1998 revenues
increased more than 25% from 1997.

Three basic sales strategies have been established for CICC:

o    The Systems Integration  operation provides services to Chinese businesses,
     government  users and other joint ventures in the PRC involving the sale of
     desktop and other computer  products with a focus on office  automation and
     Material Replenishment Planning ("MRP") software.

o    The Handwriter(R) operation focuses on the sale of Handwriter(R) tablets to
     both end users and dealers  leveraging CIC's Chinese  recognizer  software.
     CICC  is a  leading  supplier  of  Handwriter(R)  products  to the  Chinese
     Government.

o    The OEM sales  strategy  involves  the sale and  licensing  of  handwriting
     recognition,  and other software  products to the emerging Chinese computer
     and smart phone OEM market.

     Management expects continued sales growth for CICC driven by the increasing
market demand for Handwriter(R) tablets and OEM license opportunities.

Core Technologies

     The Company offers a wide range of  multi-platform  software  products that
enable or enhance  pen-based  computing.  The Company's  core  technologies  are
classified  into  two  broad  categories:   "natural  input   technologies"  and
"transaction and communication enabling technologies."

     Natural Input  Technologies.  CIC's natural input technologies are designed
to allow users to interact with a computer or handheld  device by using a pen or
"stylus"  as the sole input  device or in  conjunction  with a  keyboard.  CIC's
natural input offerings include multilingual handwriting recognition systems and
ink capture  technologies.  Many small  handheld  appliances  such as electronic
organizers,  pagers and smart cellular  phones do not have a keyboard.  For such
appliances,  handwriting recognition offers one of the most viable solutions for
performing  text entry and  editing.  The  Company's  ink  capture  technologies
facilitate  the  capture of  electronic  ink for  notetaking,  drawings or short
handwritten messages.

     Transaction  and  Communication   Enabling   Technologies.   The  Company's
transaction and  communication  enabling  technologies are designed to provide a
cost-effective  means for securing  electronic  transactions,  providing  access
control and enabling  workflow  automation of traditional paper form processing.
CIC believes that these technologies offer more efficient methods for conducting
electronic  transactions  and provide more  functional user  authentication  and
heightened data security.  The Company's transaction and communication  enabling
technologies  have been fundamental in its development of software for signature
verification, data security, data compression and pen-operating environments.

                                       5
<PAGE>
Products

Key CIC products include the following:

 Handwriter(R)and Jot(R)     Handwriting recognition software
 INKshrINK(R)                Electronic ink data compression software
 InkTools(TM)                A suite of application development tools 
                               for electronic signatures
 QuickNotes(TM)              Electronic notetaking software
 Sign-it(TM)                 Digital  signature  support  for  Word  '97
                               and  Acrobat  4.0
 PenX(TM)                    Operating  system  extensions for Windows(R)
                             '95, '98, NT and CE
 CIC  Speller(TM)            Provides  universal  spell  checking  in  
                             Windows(R)CEapplications

Products that were introduced and first shipped in 1998 include:

 Sign-it(TM)for Microsoft(R) Word '97
 Jot(R) Pro for the  Windows(R) CE Palm-size PCs
 Jot(R)for Palm(TM)and PalmPilot(TM)connected  organizers
 PenX(TM) v. 1.5
 QuickNotes(TM)for Palm(TM)and PalmPilot(TM)connected organizers
 QuickNotes(TM) for Windows(R) CE Palm-size PCs

     Handwriting   recognition  software  analyzes  the  individual  strokes  of
characters  written with a pen/stylus  and converts these stokes into an "ASCII"
text  character.  This  software is  especially  useful for portable  electronic
devices  that  are too  small  to  employ  a  keyboard,  and for  the  input  of
ideographic  script  characters  such as  those  used  in  written  Chinese  and
Japanese. The Company currently has two recognition system offerings.

     The  Handwriter(R)  Recognition  System  ("HRS(TM)")  is  an  award-winning
software  solution for  recognizing  handwritten  input on Windows(R)  based pen
computers and desktop PCs. HRS(TM) accurately recognizes  handwritten characters
with no training of the recognizer  required,  so the user can write  naturally.
HRS(TM) is a full context  recognizer  that offers some unique  features such as
automatic spacing between words and automatic capitalization of the first letter
of new sentences.  HRS(TM) software is currently shipping on many of the leading
Windows(R)  based pen computers.  Vertical  market  licensees of HRS(TM) who are
currently  shipping the recognizer  include  Fujitsu,  Intermec,  Mitsubishi and
NEC/Philips. The Chinese version of the HRS(TM) recognizer is also available for
OEM licensing worldwide.

     Jot(R) is a print based recognizer that is specifically  designed for small
form factor  devices.  Unlike many  recognizers  that  compete in the market for
handheld data input  solutions,  Jot(R) offers a patented  user  interface  that
allows  for  the  input  of  natural  upper  and  lowercase  letters,   standard
punctuation and European languages without requiring the user to memorize unique
characters or symbols.  This  recognizer  offers rapid and accurate  recognition
without  requiring  the consumer to spend time  training  the system.  Jot(R) is
currently  licensed to Microsoft  and ships with every  Palm-size  PC.  Consumer
offerings of Jot(R) include  versions for Handheld PCs ("H/PCs"),  Palm-size PCs
(upgrade to bundled  version) and the  PalmPilot(TM)  and  Palm(TM)  organizers.
Jot(R) has been ported to many operating  platforms  including the PalmOS,  OS/9
for the Nortel Smart Phone and is currently under  development  for others.  The
standard  version of Jot(R),  which is  available  through OEM,  enterprise  and
consumer product offerings, recognizes and supports input of Roman-based Western
European languages.

     InkTools(TM),  a dynamic signature verification software tool-kit, analyzes
the image,  speed,  stroke sequence and  acceleration  of a person's  electronic
signature.   InkTools(TM)   provides  an  extremely  effective  and  inexpensive
biometric  security  check.  Commercial  applications  for this type of software
include document approval,  verification of the identity of users  participating
in electronic  transactions  and securing  log-in access to computer  systems or
protected networks.

     Sign-it(TM)  is a family of  signature  products  for enabling the capture,
binding and verification of signatures  within standard  consumer  applications.
Organizations  wishing to process  electronic forms requiring  varying levels of

                                       6
<PAGE>
security  can  reduce  the need for  paper  forms by  adding  signature  capture
technologies to their workflow  solution.  Current  signature  capture solutions
include Sign-it(TM) for Word '97 and Adobe Acrobat 4.0.

     Electronic  inking  technologies are used to mark-up  electronic  documents
without  printing a hard copy,  and to make  electronic  sketches and  drawings.
Electronic  ink is a data type that is made up of pixels verses text  characters
and, unless  compressed,  takes up large amounts of computer memory.  Electronic
ink may be used to capture signatures or for short handwritten messaging.  CIC's
electronic ink compression software,  INKshrINK(R),  compresses and decompresses
electronic  ink  quickly  and  efficiently.  This  facilitates  the  storage and
transmission of electronic ink in a compressed state, which reduces transmission
time and the amount of computer  memory  necessary for storage,  thus decreasing
the cost of use.  Decompression is almost  instantaneous,  allowing for accurate
visual presentation on computer display screens without perceptible delays.

     The Company's  products are marketed  through three sales  approaches:  OEM
Sales, Enterprise Sales and Consumer Sales.

     OEM  Licensed  Products.  CIC  currently  licenses  software  products  for
Windows(R)3.x,  Windows(R)'95 and Windows(R)NT operating systems, as well as for
the new  Windows(R)CE  operating  system for Handheld PCs and Palm-size PCs. CIC
also ports its products to other  platforms,  such as OS/9 and EPOC, to meet the
specifications of new licensees. The Company's Handwriter(R)  Recognition System
is licensed for portable  PCs  utilizing  the  Windows(R)3.x  and  Windows(R)'95
operating  systems,  and is  primarily  used for field force  automation  and in
pen-input  PC  peripherals  for  desktop  use.  Jot(R),  QuickNotes(TM)  and CIC
Speller(TM) are licensed  primarily for the new, smaller classes of Handheld PCs
and Palm-size PCs such as those that utilize the  Windows(R)CE  operating system
and handheld  communicators  such as smart phones.  New OEM licensing  growth is
also  expected  from the  licensing  of CIC's  PenX(TM),  pen  operating  system
extensions. One of the licensees in 1998 for PenX(TM) was Fujitsu.

     In December  1997,  the Company  announced its first OEM license  agreement
with  Nortel  for  Jot(R)  and  INKshrINK(R)  to  be  used  in  a  new  wireless
communication  device that could be  categorized  as a "smart  phone," a product
that combines the voice communication capability of a digital cellular telephone
with the data  capabilities  of a Handheld PC. These  technologies  are also the
basis for the licensing agreement concluded with Ericsson at the end of 1998 for
two new smart phone reference designs.

     Enterprise  Solution  Products.  CIC offers several  products  targeted for
markets  in the  regulatory  and  security  sensitive  industries  that  require
workflow  automation  solutions,  such as  electronic  form  filing and  network
communication.   For  these  markets,  CIC  offers  several  products  including
InkTools(TM),   a  high  performance  Windows(R)  (`95  ,`98  and  NT)  software
developer's kit for  implementing  systems using  electronic ink and handwritten
signatures.  InkTools(TM) provides electronic ink capture and display, signature
verification and electronic ink compression. InkTools(TM) is a new release which
incorporates  ActiveX  technology  and enhanced  Visual Basic  support for CIC's
primary developer's tool kit, allowing signature capture and verification within
computer applications.

     New  developments  on  CIC's  PenX(TM),   pen  extensions  for  Windows(R),
technology have been directed at enabling our Enterprise  applications to run in
a distributed network architecture.  The primary focus of these efforts has been
in  emerging  Independent  Computing  Architecture  ("ICA"),  in which  PenX(TM)
enables the full  functionality of pen-based clients including PCs with tablets,
handheld devices, and Windows(R) pen computers.

     Consumer  Product  Offerings.  The Company's  consumer sales  department is
charged  with the sale of the  Company's  aftermarket  software  offerings.  The
consumer  product  line  currently   consists  of  Jot(R),   QuickNotes(TM)  and
Sign-it(TM).  These  product are sold over the internet on CIC's own website and
by other internet-based  electronic  resellers.  Consumer versions of Jot(R) and
QuickNotes(TM)  are being sold for users of the Palm(TM)  III and  PalmPilot(TM)
connected  organizers  in  addition to  Windows(R)  CE based  Palm-size  PCs and
Handheld PCs. Much of the growth in consumer sales this year was attributable to
sales  of  Jot(R)  and   QuickNotes(TM)   to  users  of  the  Palm(TM)  III  and
PalmPilot(TM)  devices.  The Company has also  registered  two new domain  names
(internet website  addresses) for use in direct mail campaigns and other special
promotions  targeting  the  PalmPilot(TM)  installed  base  which  is  currently
estimated to consist of more than 2 million users.


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<PAGE>
History

     The Company was  initially  incorporated  in Delaware in October  1986 as a
wholly owned  subsidiary of a predecessor  corporation  with the same name.  The
Company  has a  90%-owned  joint  venture (the  "Joint  Venture"), Communication
Intelligence  Computer  Corporation,  Ltd.,  with  the  Ministry  of  Electronic
Industries of the Jiangsu Province, a provincial agency of the People's Republic
of China. The Joint Venture was formed in September 1993.

     In each year since its inception,  the Company has incurred losses. In July
1994, the Company filed a voluntary  petition for  reorganization and protection
under  Chapter  11 of the United  States  Bankruptcy  Code in the United  States
Bankruptcy Court for the District of San Francisco  primarily to restructure the
Company and its debt. On November 14, 1994, the Company's pre-petition creditors
approved,  and the United States Bankruptcy Court confirmed,  the Company's Plan
of  Reorganization  (the "Plan"),  and the Company emerged from bankruptcy.  The
Plan provided for the payment in full, in cash, of all allowed  unsecured claims
of creditors while leaving secured  creditors  unimpaired by providing for their
payment in  compliance  with the original  terms and  conditions of their loans.
Creditors were paid in three  approximately equal installments in February 1995,
1996,  and 1997,  respectively.  In addition,  under the Plan each holder of the
Company's  then  outstanding  shares of Common Stock and  Convertible  Preferred
Stock received one unit,  which  consisted of two shares of Common Stock and one
Common  Stock  purchase  warrant with an exercise  price of $0.50 per share,  in
exchange for two shares of  Convertible  Preferred  Stock or Common  Stock.  All
unexercised warrants issued pursuant to the Plan expired in December 1994. Since
July 1994, the Company has  consummated a number of debt and equity  financings.
For  further  information  concerning  these  transactions,   see  "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations-Liquidity and Capital Resources."

Copyrights, Patents and Trademarks

     The Company  relies on a combination  of patents,  copyrights,  trademarks,
trade secrets and contractual  provisions to protect its software  offerings and
technologies. There can be no assurance, however, that these protections will be
adequate  or that  the  Company's  competitors  will not  independently  develop
technologies  that are  substantially  equivalent  or superior to the  Company's
technologies.  In addition, the laws of certain countries in which the Company's
products are licensed may not protect the  Company's  products and  intellectual
property rights to the same extent as the laws of the United States.  Because of
the rapid evolution of technology and uncertainties in intellectual property law
in the United  States and  internationally,  there can be no assurance  that the
Company's  current or future  products  or  technologies  will not be subject to
infringement by others. The Company's  licensees and distributors have access to
proprietary information of the Company. In addition a substantial portion of the
Company's  technology  and know-how are trade  secrets and are not  protected by
patent,  trademark or copyright  laws. The Company has a policy of requiring its
employees and  contractors to respect  proprietary  information  through written
agreements.  The Company  also has a policy of  requiring  prospective  business
partners to enter into  non-disclosure  agreements  before any of the  Company's
proprietary  information is revealed to them. There can be no assurance that the
measures  taken by the Company to protect its  technologies,  products and other
proprietary rights will adequately protect it against improper use.

     Certain  technological  processes  originally  implemented in the Company's
software   offerings   were   developed   and  patented  by  Stanford   Research
International  ("SRI")  and  SRI  assigned  those  patents,  which  subsequently
expired,  to the Company.  The Company has made significant  improvements to the
original  technologies  and additional  patents  relating to such  technological
improvements  have been applied for or issued.  Therefore,  the Company does not
believe  that  the  expiration  of  the  SRI  patents  has  had or  will  have a
significant  effect on its  operations.  Other major  elements of the  Company's
software  offerings and technologies were developed by the Company and have been
patented.  Certain of the Company's  existing  patents  expire between the years
2002 and 2005.  The  Company is unable to predict at this time the impact to its
business, if any, from such expiration.

     CIC(R) and its logo, Handwriter(R), Jot(R), and INKshrINK(R) are registered
trademarks of the Company.  CIC Speller(TM),  HRS(TM),  InkTools(TM),  PenX(TM),
QuickNotes(TM),  and Sign-it(TM) are trademarks of the Company. Applications for
registration  of various  trademarks are pending in the United  States,  France,
Germany,  Italy,  Japan,  Spain and the United  Kingdom.  The Company intends to
register its trademarks  generally in those jurisdictions where its products are
or will be marketed in the foreseeable future.

                                       8
<PAGE>
     The Company may be required or elect to take various  forms of legal action
from time to time to protect its proprietary  rights.  Any litigation  regarding
claims  against the Company or claims made by the Company  against  others could
result  in  significant  expense  to the  Company,  divert  the  efforts  of its
technical and  management  personnel and have a material  adverse  effect on the
Company,  whether or not such litigation is ultimately  resolved in favor of the
Company.  In the event of an adverse result in any such litigation,  the Company
may be  required  to expend  significant  resources  to  develop  non-infringing
technology or obtain licenses from third parties. There can be no assurance that
the Company would be successful  in such  development  or that any such licenses
would be available on commercially reasonable terms, if at all.

Seasonality of Business

     The Company has not  experienced  seasonal  trends  affecting  sales of its
products or the development or licensing of its technologies.

Material Customers

     Historically the Company's revenues have been derived from a limited number
of customers or other  sources.  No one customer  accounted for more than 10% of
the Company's revenues in 1998. Three customers accounted for approximately 27%,
16%, and 15%,  respectively,  of the Company's  revenues in 1997.  Two customers
accounted for approximately 11% and 10%, respectively, of the Company's revenues
in 1996. The loss of any  significant  customer or other source of revenue could
have a material adverse effect on the Company.

Backlog

     At December 31, 1998, backlog  approximated  $782,000  representing NRE and
pre-paid royalties  associated with the Ericsson  agreement.  The Company had no
significant  backlog at December  31, 1997 and a backlog of $195,000 at December
31, 1996. Backlog consists of orders placed for the Company's products that have
not been  shipped as of December  31st due to third party  shipping and delivery
requirements.

Competition

     The markets for CIC's offerings are competitive and have attracted a number
of  competitors  within  certain  product  markets.  The  Company  intends to be
responsive to emerging  market demands as well as  competitive  threats in those
specific markets where there is competition.  While these competitors may pose a
threat to the  Company's  efforts to gain market share within  certain  markets,
these competitors also help bring attention to and build awareness for pen-input
solutions.  Certain  competitors  of  the  Company  have  substantially  greater
financial  and other  resources  than that of the  Company.  The  Company  faces
competition  at different  levels.  Certain  competitors  have  developed or are
developing  software  offerings  which may compete  directly  with the Company's
offerings.  Most of the  direct  competitors  of CIC  have  focused  only on one
element of such systems, such as handwriting recognition  technology,  signature
capture/verification  or pen-based  operating  environments,  or other pen-based
applications.  While the Company believes that it has a competitive advantage in
some cases due to its range of product offerings, there can be no assurance that
competitors  will not succeed in developing  products or  technologies  that are
more effective,  easier to use or less expensive than the Company's  products or
technologies  or that  would  render  the  Company's  products  or  technologies
obsolete or  non-competitive.  Competitors of the Company include certain of the
Company's  current  and  potential  strategic  partners  and  customers  who are
developing or acquiring  alternative  products and technologies to those offered
by the Company.  There can be no assurance that companies with which the Company
has established or will establish distribution,  license, product development or
other strategic relationships will not choose to market competitive technologies
or products developed  internally or acquired from third parties.  The Company's
strategic  partners  also have had  access  to  proprietary  information  of the
Company,  and  there  can be no  assurance  that the  Company's  confidentiality
agreements with its strategic  partners will  adequately  protect it against the
improper use of such proprietary information.


                                       9
<PAGE>
Joint Venture in the People's Republic of China

     The Company  currently  owns 90% of the Joint  Venture with the Ministry of
Electronic  Industries  of the  Jiangsu  Province,  a  provincial  agency of the
People's Republic of China (the "Agency").  As of December 31, 1998, the Company
had  contributed  an aggregate of $1.8 million in cash to the Joint  Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights and the Agency had  contributed  certain  land use rights.  In 1998,  the
registered  capital of the Joint Venture was reduced and therefore,  pursuant to
the  terms  and   provisions  of  the  Joint  Venture   agreement,   no  further
contributions  are  required  by either  party.  For  further  information,  see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations-Joint Venture in the People's Republic of China."

Employees

     As of March 24,  1999,  the  Company  and the  Joint  Venture  employed  73
full-time employees, 28 of which are in the United States and 45 of which are in
China. From time to time, the Company also engages additional personnel on an as
needed basis.  The Company  believes it has good  relations  with its employees.
None of the Company's employees is a party to a collective bargaining agreement.

Segments

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of An
Enterprise and Related  Information"  ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating  segments and was required to be adopted in
periods  beginning  after December 15, 1997. It also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major
customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and
the Company's  information  has been broken down into two segments - Handwriting
Recognition and Systems  Integration.  For further information see Note 9 to the
Company's Consolidated Financial Statements.

Geographic Areas

     For the years ended December 31, 1998, 1997, and 1996, the Company's export
sales as a percentage  of total  revenues were  approximately  16%, 40%, and 7%,
respectively.  The decrease in export sales in 1998 is due to the recognition in
1997 of  deferred  royalty  revenue of  approximately  $1,424,000  from  foreign
customers for which the Company had no further  obligation to provide additional
software or services  compared to  $403,000  in 1998.  In  conjunction  with the
Company's current business strategy,  all licensing activities for the Company's
software  technologies  will be conducted from the United  States.  Revenues are
attributed either to the U.S. or China based on whether the Company or the Joint
Venture are  responsible  for fulfilling the contract  commitments.  In December
1997,  the  Company  closed  its sales  office in Japan.  Although  the  Company
maintains  certain  agreements  with  Japanese   customers,   the  revenues  are
attributed to the Company's U.S. operations.  Due to the volume of the Company's
sales on its website,  and the low selling price of the products offered,  it is
not  economically  feasible  to track  individual  unit  sales by  country,  and
therefore all website sales are attributed to the U.S. operation. The Company is
subject to various  risks in  connection  with the Joint Venture in the People's
Republic of China,  including  risks  commonly  associated  with doing  business
abroad.  For further  information see  "Management's  Discussion and Analysis of
Financial  Condition  and  Results  of  Operations"  and  Notes  2 and 9 to  the
Company's Consolidated Financial Statements.

Year 2000

     Year 2000 issues arise  because  most  computer  systems and programs  were
designed  to handle only a two-digit  date code for the year,  not a  four-digit
code. Thus, the Year 2000 could be interpreted as the year 1900 by such computer
systems and  programs,  resulting in the  incorrect  processing  of data.  CIC's
software products as developed and distributed by CIC are not date sensitive and
therefore Year 2000 issues are not applicable to such products.  The Company has
evaluated  its  internal  software  programs  and  equipment  to  ascertain  the
readiness  of  computer  software  and  operating  systems  for the  Year  2000.
Management of the Company believes that its internal  software programs are Year
2000  compliant.  The Company is  currently  in the process of  replacing  older
desktop PC's which

                                       10
<PAGE>
are not, nor cannot be upgraded to be, Year 2000  compliant.  The replacement of
such older computer equipment is expected to be completed by April 30, 1999. The
cost of replacing  these desktop  systems is not expected to be significant  The
Company is not aware of any other internal problems.

     The  Company is in the  process of  analyzing  the  readiness  of the third
parties  with  which  it does  business.  The  Company  believes  that  the only
potentially  significant  Year 2000 problems it may experience  will result from
Year 2000 issues  affecting  its website or its banks.  The Company  generates a
significant  percentage  of  revenues  from sales made via its  website.  If the
Company's  website  were to go off-line for an extended  period of time,  income
would be  significantly  impacted  until service was  restored.  The Company has
received assurances that its website is Year 2000 compliant, however, it has not
received  any  information  regarding  the phone  carrier that links the website
server to the internet.  The Company believes that it is not possible to develop
a contingency  plan at this time for dealing with the potential  effects of such
an event. If banking systems were to fail due to Year 2000 problems, the Company
may be cut off  from  access  to some of its  funds  for a period  of time.  The
Company  maintains  its cash  with  various  financial  institutions  so that an
incident at any one bank would not have a severe  impact on the  Company's  cash
availability.

Forward Looking Statements

     Certain statements  contained in this Annual Report on Form 10-K, including
without limitation,  statements containing the words "believes",  "anticipates",
"hopes",  "intends",  "expects",  and other words of similar import,  constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks,  uncertainties and
other  factors  which  may  cause  actual  events  to  differ   materially  from
expectations.   Such  factors   include  the   following:   (1)   technological,
engineering,  quality control or other  circumstances which could delay the sale
or  shipment of the  Company's  products;  (2)  economic,  business,  market and
competitive  conditions in the software industry and  technological  innovations
which could  affect the  Company's  business;  (3) the  Company's  inability  to
protect  its  trade  secrets  or  other  proprietary  rights,   operate  without
infringing  upon the  proprietary  rights  of  others  or  prevent  others  from
infringing on the proprietary  rights of the Company;  and (4) general  economic
and business conditions and the availability of sufficient financing.

Item 2. Properties

     The Company  currently  leases its  principal  facilities  (the  "Principal
Offices"),  consisting of  approximately  11,717 square feet, in Redwood Shores,
California,  pursuant to a sub-lease  that  expires in 2001.  In  addition,  the
Company  sub-leases  to third parties  approximately  8,200 square feet of space
near  the  Principal  Offices.  The  sub-leases  expire  in  1999.  The  Company
originally  leased  the  additional  space  in  1997  in  order  to  accommodate
additional  personnel  hired by the Company in the last three  months of 1996 in
connection  with its increased  marketing  activities  at that time.  Due to the
Company's  current  business  strategy and other cost  reduction  programs,  the
additional  space  is not  required  at this  time.  The  Joint  Venture  leases
approximately 1,000 square feet in Nanjing,  China. The Company anticipates that
its  existing  leases will be  renegotiated  as they expire or that  alternative
properties can be leased on acceptable terms. The Company also believes that its
current  facilities  will  be  suitable  for it to  continue  operations  in the
forseeable future.

Item 3. Legal Proceedings

     As of March 29, 1999, the Company was not a party to any legal  proceeding,
which,  if adversely  determined,  would have a material  adverse  effect on its
business.  In July 1994,  the  Company  filed a petition  for  bankruptcy  under
Chapter 11 of the United  States  Bankruptcy  Code in order to  restructure  the
Company and its debt. In November  1994, the Plan was approved and confirmed and
the Company emerged from bankruptcy. See "Item 1. Business-History."

Item 4. Submission of Matters to a Vote of Security Holders

     None

                                       11
<PAGE>
                                     PART II

Item 5. Market For Registrant's Common Equity and Related Stockholder Matters

     The  Company's  Common  Stock is  currently  listed on the Nasdaq  SmallCap
Market under the trading symbol "CICI." In September 1991, the Company's  Common
Stock was first listed on the Nasdaq  SmallCap  Market,  and in June 1993 it was
listed on the Nasdaq National Market. In July 1994 (during the Company's Chapter
11  reorganization  proceedings),  the  Company's  Common Stock was delisted for
failure to meet Nasdaq's continued listing requirements.  From July 1994 to July
1996,  quotations  concerning the Common Stock were reported on the OTC Bulletin
Board.  In July 1996,  the  Company's  Common  Stock was  relisted on The Nasdaq
SmallCap Market.  The following table sets forth the high and low sale prices of
the Common for the periods noted.
<TABLE>

                                                            Sale Price
                                                            Per Share
     Year    Period                                        High      Low
<CAPTION>
<S>        <C>                                          <C>     <C>    
     1997    First Quarter..............................  $ 3.88  $ 1.81
             Second Quarter.............................  $ 2.53  $ 1.75
             Third Quarter..............................  $ 2.13  $ 1.13
             Fourth Quarter.............................  $ 2.75  $ 1.06
     1998    First Quarter..............................  $ 1.75  $ 1.03
             Second Quarter.............................  $ 1.22  $ 1.00
             Third Quarter..............................  $ 1.19  $ 0.59
             Fourth Quarter.............................  $ 0.91  $ 0.41
     1999    First Quarter (through March 29, 1999).....  $ 0.69  $ 2.46
</TABLE>


     As of March 29,  1999,  the closing  sale price of the Common  Stock on the
Nasdaq  SmallCap  Market  was $1.93 per share and there were  approximately  650
registered holders of the Common Stock.

     To date,  the Company has not paid any  dividends  on its Common  Stock and
does not anticipate paying dividends in the foreseeable  future. The declaration
and payment of dividends on the Common Stock is at the  discretion  of the Board
of Directors  and will depend on, among other things,  the  Company's  operating
results, financial condition, capital requirements,  contractual restrictions or
such other factors as the Board of Directors may deem relevant.


                                       12
<PAGE>
Item 6. Selected Financial Data

     The selected consolidated financial data presented below as of December 31,
1998,  1997,  1996,  1995 and 1994  and for each of the  years in the  five-year
period  ended  December  31,  1998 are  derived  from the  audited  consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 1998 and 1997, and for each of the years in the  three-year  period
ended  December 31, 1998, are included in Item 8 of this Form 10-K. The selected
consolidated  financial  data should be read in  conjunction  with the Company's
audited  financial  statements  and the notes thereto and other portions of this
Form 10-K  including  "Business"  and  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>

                                            Year Ended December 31,
                               -------------------------------------------------
                                  1998      1997      1996      1995      1994
                               -------------------------------------------------
                                   (In thousands, except per share amounts)
<CAPTION>
<S>                          <C>        <C>      <C>        <C>      <C>   
Statement of Operations Data:
Revenues...................... $  4,581   $ 5,516  $  2,887   $  2,314  $ 3,599
Research and development 
expenses(1)...................    1,989     2,360     1,672      1,355    2,062
Sales and marketing 
expenses......................    2,015     6,257     3,282      2,613    4,936
General and administrative
 expenses.....................    1,889     2,663     2,037      1,717    2,395
Loss from operations..........   (3,285)  (11,627)   (6,535)    (5,534)  10,935)
Net loss available to common
 stockholders(2)..............   (3,592)  (16,940)   (6,356)    (5,595) (11,048)
Basic and diluted loss per
 common share.................    (0.06)    (0.37)    (0.15)     (0.16)   (0.53)
</TABLE>

<TABLE>
                                               As of December 31,
                               -------------------------------------------------
                                   1998     1997       1996     1995      1994
                               -------------------------------------------------
                                                (In thousands)
<CAPTION>
<S>                              <C>      <C>       <C>       <C>     <C>   
Balance Sheet Data:
Cash, cash equivalents and 
restricted cash...............     $ 1,045  $  5,485  $ 11,325  $ 7,459 $ 4,088
Working capital (deficit)(3)..         346     2,721     8,284    3,763    (605)
Total assets..................       3,354     7,491    13,503    9,776   6,171
Deferred revenue..............         651       440     2,006    2,570   2,754
Long-term obligations.........           -         8        32      830   2,069
Redeemable securities(4)......           -         -     9,417        -        -
Stockholders' equity (deficit)(5).   1,332     3,989       (82)   4,010  (1,219)
</TABLE>

-----------

(1)      Excludes  software  development  costs  capitalized in accordance  with
         Statement of Financial Accounting Standards No. 86 of $17,000,  $20,000
         and $436,000 for the years ended  December  31, 1998,  1995,  and 1994,
         respectively. There was no capitalization of software development costs
         in the years ended December 31, 1997 and 1996, respectively.

(2)      The Company's 1997 net loss applicable to common stockholders  includes
         a one-time,  non-cash  charge of $4.9  million  related to the embedded
         yield on the Company's Series A Preferred Stock issued in December 1996
         due to the  discounted  conversion  provisions  of such  stock  and the
         cumulative  dividends  of  $1.25  per  share,  per  annum  on  Series A
         Preferred  Stock.  The  Company's  1998 net loss  applicable  to common
         stockholders  includes dividends on Series A Preferred Stock and Series
         B Preferred Stock of $435.

(3)      Current  liabilities used to calculate working capital at December 31,
         1998,  1997,  1996,  1995, and 1994 include  deferred revenue of $651,
         $440, $2,006, $2,570, and $2,754, respectively.

(4)      Refer to Note 5 to of the Company's  Consolidated Financial Statements
         included in Item 8 of this Form 10-K.

(5)      The  Company  has never paid  dividends  to the  holders of its common
         stock.  Item 7.  Management's  Discussion  and  Analysis of  Financial
         Condition and Results of Operations.


                                       13
<PAGE>
Overview

     History.  The Company  was  initially  incorporated  in Delaware in October
1986. In each year since its inception, the Company has incurred losses. For the
five-year period ended December 31, 1998,  losses  aggregated  approximately $43
million  and,  at December  31,  1998,  the  Company's  accumulated  deficit was
approximately  $69  million.  In July 1994,  the  Company  filed a petition  for
reorganization  and protection under Chapter 11 of the United States  Bankruptcy
Code in order to  restructure  the Company and its debt. In November,  1994, the
Company's  pre-petition  creditors  approved,  and the United States  Bankruptcy
Court confirmed,  the Company's Plan of  Reorganization  and the Company emerged
from bankruptcy. See "Item 1. Business - History."

     Revenue  Recognition.  In October 1997, the American Institute of Certified
Public  Accountants  (the  "AICPA")  issued  Statement  of  Position  No.  97-2,
"Software Revenue  Recognition" ("SOP 97-2"),  which the Company has adopted for
transactions  entered into during the fiscal year beginning January 1, 1998. SOP
97-2 provides  guidance for  recognizing  revenue on software  transactions  and
supersedes  Statement of Position No. 91-1,  "Software Revenue  Recognition." In
March 1998,  the AICPA issued  Statement of Position No. 98-4,  "Deferral of the
Effective Date of a Provision of SOP 97-2,  Software Revenue  Recognition" ("SOP
98-4").  SOP 98-4 defers,  for one year, the application of certain  passages in
SOP 97-2  which  limit what is  considered  vendor-specific  objective  evidence
necessary  to  recognize  revenue  for  software  licenses  in  multiple-element
arrangements when undelivered elements exist. In December 1998, the AICPA issued
Statement of Position No. 98-9 ("SOP 98-9")  "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 extends the
effective date of SOP 98-4 and provides additional  interpretative guidance. SOP
98-9 is effective for fiscal years  beginning  after March 15, 1999. The Company
will determine the impact,  if any, of SOP 98-9 on current  revenue  recognition
practices when adopted. Adoption of the remaining provisions of SOP 97-2 did not
have a material impact on revenue recognition during 1998.

     Revenue from retail  product sales is recognized  upon sell through,  while
revenue from other product sales is recognized  upon shipment,  provided that no
significant  obligations remain and that collection of the resulting  receivable
is likely.  The Company  provides  for  estimated  sales  returns at the time of
shipment.

     License  revenues are  recognized  when the software has been delivered and
all significant  obligations  have been met.  Royalty revenues are recognized as
products  are licensed  and sold by  licensees.  Under the terms of an agreement
with IBM Corporation ("IBM"), the Company is obligated to share with IBM certain
revenues from third parties when earned.

     Revenues  from   development   contracts  are  primarily   generated   from
non-recurring  engineering  fees and research  grants.  Revenue is recognized in
accordance  with  the  terms  of  the  grants  and  agreements,  generally  when
collection is probable and related costs have been incurred.

     Sources of Revenues.  To date,  the  Company's  revenues  have been derived
principally  from  end-users,  manufacturers,   retailers  and  distributors  of
computer  products in North  America,  Europe and the Pacific  Rim.  The Company
performs  periodic  credit  evaluations  of its  customers  and does not require
collateral.   The  Company  maintains  reserves  for  potential  credit  losses.
Historically,  such  losses  have been  insignificant  and  within  management's
expectations.

     Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial  Accounting Standards No. 86, "Accounting
for the Costs of Computer  Software to be Sold,  Leased or  Otherwise  Marketed"
("SFAS 86"). Under SFAS 86,  capitalization of software development costs begins
upon the establishment of technological  feasibility,  subject to net realizable
value considerations.  In the Company's case,  capitalization commences upon the
completion  of a  working  model and  generally  ends  upon the  release  of the
product. As of December 31, 1998, 1997 and 1996, such costs were insignificant.

                                       14
<PAGE>
Significant  Customers.  No one  customer  accounted  for more than 10% of total
revenues in 1998. Three customers accounted for approximately 27%, 16%, and 15%,
respectively, of the Company's revenues in 1997. Two customers accounted for 11%
and 10%, respectively, of revenues in 1996.

Research and Development.
   
     Research and development costs are charged to expense as incurred.

     Foreign Currency Translation. The Company considers the functional currency
of the Joint Venture to be the respective local currency and, accordingly, gains
and  losses  from  the  translation  of the  local  foreign  currency  financial
statements are included as a component of "accumulated other comprehensive loss"
in the Company's  consolidated  balance sheets included in this Annual Report on
Form 10-K.  Foreign  currency  assets and  liabilities  are translated into U.S.
dollars  at  exchange  rates  prevailing  at the end of the  period  except  for
non-monetary  assets and liabilities which are translated at historical exchange
rates.  Revenues and expenses are  translated at the average  exchange  rates in
effect during each period,  except for those expenses  included in balance sheet
accounts which are translated at historical exchange rates.

     Net  foreign  currency   transaction  gains  and  losses  are  included  as
components of "interest income and other income (expense), net" in the Company's
consolidated  statements  of  operations  included in this Annual Report on Form
10-K. The Company recorded a net foreign currency transaction gain of $55,000, a
loss of $101,000,  and a gain of $59,000 for the years ended  December 31, 1998,
1997 and 1996, respectively.

     Net  Operating  Loss  Carryforwards.   Utilization  of  the  Company's  net
operating  losses may be subject to an annual  limitation  due to the  ownership
change  limitations  provided by the  Internal  Revenue Code of 1986 and similar
state  provisions.  As a result,  a portion of the Company's net operating  loss
carryforwards may not be available to offset future taxable income.  The Company
has provided a full valuation  allowance for deferred tax assets at December 31,
1998 of $17,740 based upon the Company's history of losses.

     Restatement  of 1997  Quarterly  Results.  In  January  1998,  the  Company
restated the previously  issued financial  statements for the first,  second and
third quarters of 1997. The display of the net loss per common share  applicable
to common stock holders and the  components  thereof in the Company's  unaudited
condensed  consolidated  statements of operations for each of these quarters was
restated  to  reflect  the  non-cash  charge  for  the  embedded  yield  on  the
convertible  preferred stock due to the discount  conversion feature provided on
such stock and cumulative  dividends on the  convertible  preferred  stock.  The
Company  believes that the  restatements  were in accordance with the accounting
treatment of the embedded  discount on convertible  preferred stock as announced
by the Securities  and Exchange  Commission at the March 13, 1997 meeting of the
Financial Accounting Standards Board's Emerging Issues Task Force.

Results of Operations

Years Ended December 31, 1998 and December 31, 1997

     Revenues.  The Company's product sales for the year ended December 31, 1998
decreased $264,000,  or 8%, to $2,982,000 from $3,246,000 in the prior year. The
decrease  was due to the  Company's  transition  from a  combined  hardware  and
software  company to a Company  focused  primarily on software.  Hardware  sales
decreased  $1,207,000,  or 61%, to $748,000 for the year ended December 31, 1998
compared to $1,955,000 in the prior year.  This  reduction in hardware sales was
partially offset by an increase of $305,000,  or approximately 850%, in software
products  sold over the  internet via the  Company's  website for the year ended
December 31, 1998  compared to the prior year. In addition  systems  integration
activities  of the  Joint  Venture  increased  $405,000,  or  27%,  in  1998  to
$1,880,000  compared  to  $1,475,000  in 1997.  Other sales  including  software
solutions  utilizing  the  Company's  software  and  third  party  hardware  and
replacement  and  spare  hardware  and  software  components  for the  Company's
installed  hardware  base not included  above  amounted to $234,000 for the year
ended December 31, 1998 compared to $92,000 in the prior year.

     Revenues from license and royalty fees for the year ended December 31, 1998
decreased by $542,000, or 29%, to $1,300,000 from $1,842,000 for the prior year.
The decrease was primarily  attributable to the recognition in the prior year of
approximately  $1,424,000 of royalty revenues  deferred in prior years that were
recognized on  agreements  for


                                       15
<PAGE>
which the Company had no further  obligations  to
deliver  additional  software or services,  compared to $402,000  recognized  in
1998.

     Revenues from development contracts for 1998 decreased 30% to $298,000 from
$428,000  for the  prior  year due  primarily  to  reductions  in  non-recurring
engineering  revenues.  Revenues from development contracts in 1998 and 1997 are
primarily  attributable to grants awarded by the National Institute of Standards
and Technology and the National Science Foundation.

     Cost of Sales.  Cost of sales is  composed  of costs  from  product  sales,
license and royalty fees and  development  contracts.  Cost of product  sales in
1998 consisted primarily of cost of materials, approximately $1,420,000 of which
related  to the  hardware  and  software  components  involved  in  the  systems
integration  activities  of the Joint Venture and the remainder of which related
to material and other costs of the Company's discontinued  Handwriter(R) product
sales.  Cost of product sales decreased 69% to $1,698,000 from $5,458,000 in the
prior  year.  In the  fourth  quarter  of  1997,  the  Company  wrote  down  its
Handwriter(R) products finished goods inventory by approximately  $1,600,000 due
to the intended  withdrawal of its Handwriter(R)  product from the retail market
in the first quarter of 1998.  In addition,  the Company  charged  approximately
$300,000  to  product  cost of sales in the fourth  quarter of 1997,  related to
non-cancelable    manufacturing   license   agreements   associated   with   the
Handwriter(R) products entered into in 1997. License and royalty costs decreased
by approximately $69,000, or 52%, to $63,000 in 1998 from $132,000 in 1997. This
decrease  in license  and  royalty  costs  related  primarily  to  decreases  in
capitalized software  amortization and software  maintenance.  Costs incurred in
connection  with  development  contracts  revenue are expensed as incurred,  and
decreased  22% in  1998  compared  to the  prior  year,  commensurate  with  the
reduction in development contracts revenue in the same period.

     Gross  Margin.  The gross  margin  increased to  $2,608,000  in 1998 from a
negative  margin of $347,000 in 1997.  This increase was due to a shift from low
margin  retail  hardware  sales to the  sales  of the  Company's  higher  margin
software  products,  and  there  being  no  write-offs  in 1998  similar  to the
write-offs in 1997 of Handwriter(R)  inventory and non-cancelable  manufacturing
licenses as discussed above.

     Research  and  Development  Expenses.  Research  and  development  expenses
decreased  $371,000,  or 16%, to $1,989,000  compared to $2,360,000 in the prior
year. Salaries and wages decreased  $365,000,  or 18%, to $1,535,000 compared to
$2,000,000 in the prior year.  This decrease is due to the reduction in domestic
staffing  due to moving the  development  of the Chinese  character  recognition
system to the Joint Venture which has a lower average salary per person. Outside
engineering  costs  decreased  $155,000,  or 99%, to $2,000 from $157,000 in the
prior year. This decrease is due to the  elimination of outside  development for
the Company's  discontinued hardware products.  Other overhead costs,  including
facilities and related expenses,  increased  $150,000,  or 73%, to $353,000 from
$203,000 in the prior year.  This  increase is due  primarily to the decrease in
applied  overhead to cost of sales from the  reduction in  development  contract
revenues and increases in the development effort by the Joint Venture.

     Sales and Marketing  Expenses.  Sales and marketing expenses decreased 68%,
or  $4,242,000,  to $2,015,000  for the year ended December 31, 1998 compared to
$6,257,000 in the prior year.  Salaries,  wages,  and related costs decreased by
$1,821,000, or 70%, to $774,000 compared to $2,595,000 in the prior year, due to
reductions in staffing as the Company  discontinued its sales efforts related to
hardware  products  in the  corporate  and retail  markets.  In  addition to the
reductions  in the Company's  sales force,  outside  services  particular to the
retail  market,  such as retail  site  visits  and  product  display,  were also
discontinued.   The  cost  reduction  related  to  these  services  amounted  to
approximately  $354,000,  or 96%, of the amount  incurred during the same period
last year.  Advertising and promotion expense decreased  $1,843,000,  or 89%, to
$237,000  compared to $2,080,000 in the prior year.  This decrease is due to the
reduction in costs  associated with in-store  hardware  product  positioning and
advertising in the retail channel. Other costs, including facilities and related
costs,  recruiting and training  materials  costs  associated  with the combined
corporate and retail hardware effort decreased $224,000, or 18%, compared to the
prior year.

     General and Administrative  Expenses.  General and administrative  expenses
for the year ended December 31, 1998 were $1,889,000, a decrease of $814,000, or
31%,  compared to  $2,663,000 in the prior year.  Salaries and related  expenses
decreased  $184,000 to $570,000  from  $754,000  during  1997.  The  decrease in
salaries  and  related  expenses  resulted  from a  decrease  in the  number  of
personnel.  Professional  services  including  legal,  accounting,  and investor


                                       16
<PAGE>
relations  expenses  decreased  approximately  $479,000  during  the year  ended
December  31,  1998 to $727,000  from  $1,206,000  during the same twelve  month
period last year.  The decrease is due  primarily to the reduction in the number
of  registration  statements  filed with the SEC in 1998  related to  financings
compared to 1997, and the shift of investor  relations  activities  from outside
services to internal  personnel.  Other costs  including  insurance,  telephone,
recruiting,  and  miscellaneous  expenses  decreased  $151,000 to $551,000  from
$702,000 during the prior year. The reduction in other costs is due primarily to
the reduction in personnel,  the number of recruiting efforts, and directors and
officers insurance costs.

     Interest Income and Other Income (Expense),  Net. Interest income and other
income  (expense),  net was an income  amount of $147,000 in 1998 compared to an
expense of $322,000 in 1997.  This change is due to a one-time,  non-cash charge
of $484,000 in 1997 for 300,000 warrants issued on March 28, 1997, and effective
as of December 31, 1996,  to holders of 100% of the then issued and  outstanding
shares of Series A Preferred  Stock in exchange for the execution of a waiver to
certain  provisions  of  the  registration  rights  agreement  entered  into  in
connection  with  the  private  placement  of the  Series A  Preferred  Stock in
December 1996. See Note 5 in the Consolidated Financial Statements.

     Interest Expense.  Interest expense decreased in 1998 compared to the prior
year due to the final payment in February 1997 of the pre-petition  liabilities,
the  repayment in January 1998 of the amounts  outstanding  at December 31, 1997
under the accounts  receivable  financing  agreement,  and the repayment in June
1998 of the note outstanding at December 31, 1997 for the purchase of equipment.

     Embedded Yield on Preferred  Stock.  The embedded yield on preferred  stock
results from the discount feature provided on the conversion price of the Series
A Preferred Stock into Common Stock. The embedded yield totaling  $4,376,000 was
recognized from the issuance date of December 31, 1996 through July 1, 1997, the
date on which the Series A Preferred Stock first became convertible.

     Preferred Stock  Dividends.  Preferred stock dividends relate to cumulative
dividends of $1.25 per share, per annum, compounded  semi-annually or quarterly,
respectively,  whether or not  declared,  on the Series A and Series B Preferred
Stock.  All of the shares of the Company's Series A and Series B Preferred Stock
were  converted  into Common Stock in November 1998 resulting in a decrease from
the amounts recorded in 1997.

Years Ended December 31, 1997 and December 31, 1996

     Revenues.  The Company's product sales for the year ended December 31, 1997
increased $1,655,000, or 104%, to $3,246,000 from $1,591,000 for the prior year.
The  increase  was due to  increased  sales  with  respect to the  hardware  and
software components involved in the systems integration  activities of the Joint
Venture  ($1,475,000 for 1997 compared to $1,273,000 for 1996), and increases in
sales of the Company's  Handwriter(R)  product  ($1,858,000  in 1997 compared to
$345,000 in 1996). This increase in Handwriter(R)  product revenue resulted from
the Company's sales primarily through the retail market. Though significant, the
increase in retail sales was materially less than management's  expectations and
the  Company  changed  its  strategy  during  1998  by  licensing  the  software
technologies used in Handwriter(R) products to third parties.

     Revenues from license and royalty fees for the year ended December 31, 1997
increased by  $1,026,000,  or 126%,  to  $1,842,000  from $816,000 for the prior
year.   The  increase  was  primarily   attributable   to  the   recognition  of
approximately  $1,424,000 (compared to $412,000 in the prior year) of previously
deferred  royalty  revenues that were  recognized  on  agreements  for which the
Company had no further obligations to deliver additional software or services.

     Revenues from development contracts for 1997 decreased 11% to $428,000 from
$480,000  for the  prior  year due  primarily  to  reductions  in  non-recurring
engineering  revenues.  The majority of revenues from development  contracts are
attributable  to grants  awarded by the  National  Institute  of  Standards  and
Technology  and  The  National  Science  Foundation.  Grant  revenues  increased
slightly to $253,000 in 1997 from $246,000 in 1996.

     Cost of Sales.  Cost of sales is  comprised  of costs from  product  sales,
license and royalty fees and  development  contracts.  Cost of product  sales in
1997 consisted primarily of cost of materials, approximately $1,236,000 of which
related  to the  hardware  and  software  components  involved  in  the  systems
integration  activities  of the Joint Venture and


                                       17
<PAGE>
the  remainder  of which  related to material  and other costs of the  Company's
Handwriter(R)  product sales. Cost of product sales increased 188% to $5,458,000
from  $1,894,000 in the prior year. In the fourth  quarter of 1997,  the Company
wrote down its Handwriter(R)  products finished goods inventory by approximately
$1,600,000 due to the pending  withdrawal of its Handwriter(R)  product from the
retail  market in the first quarter of 1998.  In addition,  the Company  charged
approximately  $300,000 to product cost of sales in the fourth  quarter of 1997,
related to non-cancelable manufacturing license agreements entered into in 1997.
License  and  royalty  costs  decreased  by  approximately  $50,000,  or 27%, to
$132,000  in 1997 from  $182,000 in 1996.  This  decrease in license and royalty
costs related primarily to decreases in capitalized software amortization offset
by increases in personnel and related  costs  associated  with software  product
maintenance. Costs incurred in connection with development contracts revenue are
expensed  as  incurred  and  decreased  23% in 1997  compared to the prior year,
commensurate  with the reduction in  development  contracts  revenue in the same
period.

     Gross  Margin.  The gross  margin  declined  176% to a  negative  margin of
$347,000 in 1997  compared  to a positive  margin of $456,000 in the prior year.
This decrease was primarily due to the write-offs of Handwriter(R) inventory and
non-cancelable manufacturing licenses as discussed above.

     Research  and  Development  Expenses.  Research  and  development  expenses
increased  $688,000,  or 41%, to $2,360,000  compared to $1,672,000 in the prior
year. Salaries and wages increased  $356,000,  or 29%, to $1,596,000 compared to
$1,240,000  during the prior year. This increase was due to additional  staffing
required for the  development  of new products and the continued  development of
the Chinese character  recognition  system.  Outside engineering costs increased
$86,000,  or 121%,  to  $157,000  compared  to $71,000 in the prior  year.  This
increase was due to the development of a new pen for the Company's Handwriter(R)
products and  enhancements  to the  digitizer  used in the  Handwriter(R)  Manta
product.  Other costs,  including  facilities  and related  expenses,  increased
$246,000, or 68%, to $607,000 from $361,000 in the prior year. This increase was
due  to  the  increase  in  staffing   required  to  accommodate  the  Company's
development programs.

     Sales and Marketing Expenses. Sales and marketing expenses increased 91% to
$6,257,000 in 1997 compared to $3,282,000 in the prior year. Salaries, wages and
related  costs  increased  by  $850,000,  or  58%,  to  $2,303,000  compared  to
$1,453,000 in the prior year, due to increased  staffing as the Company  pursued
sales efforts in the corporate and retail markets.  Travel and related  expenses
increased  by $72,000,  or 18%,  to  $478,000  compared to $406,000 in the prior
year. This increase was due to the geographic  locations and number of corporate
and retail  sites  serviced by the  Company's  sales  force.  In addition to the
Company's sales force,  outside services particular to the retail market such as
retail  site visits and  product  display,  were used to augment the retail site
visits.  The cost of these services  increased  consulting  service  expenses by
$93,000, or 32%, to $379,000 compared to $286,000 in the prior year. Advertising
and promotion expense increased  $1,362,000,  or 178%, to $2,128,000 compared to
$766,000  in the same  period in the prior year.  This  increase  was due to the
costs associated with in-store product positioning and advertising in the retail
channel.  Other costs  (including  facilities and related costs,  recruiting and
training  materials  costs)  associated  with the combined  corporate and retail
effort increased $599,000, or 162%, over the prior year.

     General and Administrative  Expenses.  General and administrative  expenses
increased  $626,000,  or 31%, to $2,663,000  compared to $2,037,000 in the prior
year. Professional services increased $345,000, or 295%, to $462,000 compared to
$117,000  in the prior year.  This  increase  was due to services  rendered by a
management consulting firm related to a study of the Company's overall method of
operations  and  allocation  of  personnel  in  various  capacities  within  the
organization.  Legal fees increased  $200,000,  or 124%, to $362,000 compared to
$162,000 in the prior year. This increase was primarily due to expenses incurred
with  respect  to  registration  statements  filed  with the SEC during the year
related to prior financings and  registration  rights  agreements.  Other costs,
including travel and related  expenses,  recruiting and facilities  allocations,
increased by $206,000,  or 21%, to $1,180,000  compared to $974,000 in the prior
year.  This  increase was  primarily  due to costs  incurred in recruiting a new
President  and  COO  and an  increase  in  investor  relations  services.  These
increases  were offset by a decrease in salaries and related  costs of $126,000,
or 16%, to $658,000  compared  to  $784,000  in the prior  year.  This  decrease
resulted from the transfer of personnel to other  departments  in support of the
marketing efforts.

Interest  Income and Other  Income  (Expense),  Net.  Interest  income and other
income  (expense),  net was an expense of $322,000 in 1997 compared to an income
amount of $278,000 in 1996, due to a one-time, non-cash


                                       18
<PAGE>
charge of $484,000 for 300,000  warrants issued on March 28, 1997, and effective
as of December 31, 1996,  to holders of 100% of the then issued and  outstanding
Series A Preferred  Stock in exchange  for the  execution of a waiver to certain
provisions of the registration  rights agreement entered into in connection with
the private placement of the Series A Preferred Stock in December 1996. See Note
5 to the Consolidated Financial Statements.

Interest  Expense.

     Interest  expense  decreased in 1997  compared to the prior year due to the
final payment in February 1997 of the pre-petition liabilities.

     Embedded Yield on Preferred  Stock.  The embedded yield on preferred  stock
results from the discount feature provided on the conversion price of the Series
A Preferred Stock into Common Stock. The embedded yield totaling  $4,376,000 was
recognized from the issuance date of December 31, 1996 through July 1, 1997, the
date on which the Series A Preferred Stock first became convertible.

Preferred  Stock  Dividends.

     Preferred stock  dividends in 1997 relate to cumulative  dividends of $1.25
per share,  per annum,  compounded  semi-annually  or  quarterly,  respectively,
whether or not  declared,  on the Series A and Series B Preferred  Stock.  There
were no such dividends in 1996.

Liquidity and Capital Resources

     Cash and cash equivalents at December 31, 1998 totaled $795,000 compared to
cash and cash  equivalents of $5,485,000 at December 31, 1997. This decrease was
primarily attributable to the $4,591,000 of cash used in operations, the $20,000
of cash used in investing  activities  and the $79,000 of cash used in financing
activities. In 1998, the effect of exchange rate changes on cash was immaterial.

     At December 31, 1998, current liabilities,  which include deferred revenue,
were  $2,022,000.  Deferred  revenue,  totaling  $651,000 at December  31, 1998,
primarily reflects advance  non-recurring  engineering and royalty fees received
from the Company's  licensees  which are generally  recognized as revenue by the
Company in the  period in which the  engineering  work is done or the  licensees
report that products  incorporating the Company's  software have been shipped or
when no  significant  obligation  to provide  additional  software  or  services
exists.

     As of December 31, 1998,  the Company's  principal  source of liquidity was
its cash and cash equivalents of $795,000. In each year since its inception, the
Company has incurred  losses.  Although  there can be no assurance,  the Company
anticipates that 1999 revenues will be significantly greater than 1998 revenues.
Accordingly, the Company believes that its current cash and resources,  together
with the expected  revenue  levels,  will provide  sufficient  funds for planned
operations  for at least the next  twelve  months.  However,  if the  Company is
unable to generate  adequate cash flows from sales, or if expenditures  required
to achieve the Company's  plans are greater than expected,  the Company may need
to obtain  additional funds or reduce  discretionary  spending.  There can be no
assurance that additional  funds will be available when needed,  or if available
will be on  favorable  terms  or in the  amounts  required  by the  Company.  If
adequate  funds are not  available  when needed,  the Company may be required to
delay, scale back or eliminate some or all of its operations, which could have a
material  adverse  effect on the Company's  business,  results of operations and
prospects.

     Joint Venture in the People's Republic of China. The Company currently owns
90% of a joint venture with the Ministry of Electronic Industries of the Jiangsu
Province,  a provincial agency of the People's Republic of China (the "Agency").
In June 1998,  the  registered  capital of the Joint  Venture was  reduced  from
$10,000,000 to $2,550,000.  As of December 31, 1998, the Company had contributed
an aggregate  of  $1,800,000  in cash to the Joint  Venture and provided it with
non-exclusive  licenses to technologies and certain  distribution rights and the
Agency had  contributed  certain  land use rights.  Following  the  reduction in
registered capital of the Joint Venture,  neither the Company nor the Agency are
required  to make  further  contributions  to the  Joint  Venture.  Prior to the
reduction in the amount of registered capital,  the Joint Venture was subject to
the annual licensing requirements of the Chinese government. Concurrent with the
reduction in registered  capital,  the Joint Venture's business license has been
renewed through October 18, 2043. The Company's  investment in the Joint Venture
is subject to risks of doing  business  abroad,  including  fluctuations  in the
value  of  currencies,   export  duties,  import  controls  and  trade  barriers
(including  quotas),  restrictions  on the  transfer  of funds,  longer  payment
cycles,  greater  difficulty  in  accounts  receivable  collections,  burdens of
complying with foreign laws and political and economic instability.


                                       19
<PAGE>
     Preferred Stock  Financings.  The Company's  authorized shares of preferred
stock may be issued in one or more  series,  and shares of each series will have
the  rights  and  preferences  as  determined  by  the  Board  of  Directors  in
authorizing the issuance of that particular series. In designating any series of
preferred  stock,  the Board of Directors may, without further action by holders
of Common Stock,  determine the number of shares  constituting that series,  the
dividend rights or rates, conversion rights, voting rights (which may be greater
or lesser than the voting rights of the holders of the Common Stock), rights and
terms of redemption  (including  any sinking fund  provisions)  and  liquidation
preferences  of such series.  Holders of any series of preferred  stock may have
priority claims to dividends and  distributions  upon liquidation of the Company
and other preferences over the holders of the Common Stock.

     In December  1996,  the Company  completed a private  placement  of 450,000
shares of redeemable  convertible  preferred  stock (the  "December 1996 Private
Placement") at $25.00 per share to certain institutional and other investors. Of
the aggregate  450,000  shares sold,  70,200  shares of  redeemable  convertible
preferred  stock were issued in exchange  for  390,000  shares of Common  Stock,
originally  issued in an earlier  private  placement.  The net  proceeds  to the
Company from the remaining  379,800 shares of redeemable  convertible  preferred
stock  sold  were  approximately  $7,662,000,  net of  cash  issuance  costs  of
$1,100,000 and $733,000 of value ascribed to 337,500 warrants to purchase Common
Stock issued to the  placement  agent.  The warrants  expire five years from the
date of  issuance  and have an  exercise  price of $2.50 per  share,  subject to
adjustment  for  anti-dilution.  The fair value  ascribed  to the  warrants  was
estimated on the date of issuance using the Black-Scholes pricing model with the
following  assumptions:  risk-free  interest  rate of 6.07%;  expected life of 5
years;  expected volatility of 104%; and expected dividend yield of 0%. See Note
5 to the Company's Consolidated Financial Statements.

     On November 26, 1997, the Company  completed a private placement of 240,000
shares of Series B Preferred  Stock (the "November  1997 Private  Placement") at
$25.00 per share to certain investors.  The net proceeds to the Company from the
240,000 shares of Series B Preferred  Stock sold was  approximately  $5,859,000,
net of cash issuance costs of $141,000.

     As of November  19,1998 all shares of Series A Preferred Stock and Series B
Preferred Stock had been converted into shares of Common Stock.


     Accounts Receivable Financing. In October 1997, the Company entered into an
accounts  receivable  financing agreement whereby the Company has the ability to
factor its accounts  receivable in accordance  with the terms of the  agreement.
The maximum  credit that is available  to the Company  under the  agreement  was
$1,500,000,  with an advance  rate of 80% of the  eligible  accounts  receivable
which are less than 90 days old. The term of the agreement is twelve months with
annual  renewals  and was  renewed in  October  1998  through  October  1999.  A
financing fee of 2.1% per month applies to the outstanding  balance based on the
face value of each  invoice.  The line of credit is  secured by a blanket  first
priority  lien on all Company  assets  with the  exception  of its  intellectual
property.  As of December  31,  1997,  the Company  had  financed  approximately
$425,000 of accounts  receivable  under the agreement.  The amounts  financed on
accounts  receivable at December 31, 1997 were repaid in January 1998, and there
are no amounts  currently  outstanding.  It is unlikely  that the  Company  will
finance additional accounts receivable under this agreement due to the Company's
cessation of the sale of hardware products in the retail market.

     Operating Lease  Commitments.  The Company leases  facilities in the United
States and China.  The Company's  rental expense for the year ended December 31,
1998 was approximately $420,000.  Sublease income was approximately $188,000 for
the  year  ended  December  31,  1998.   Future  minimum  lease  payments  under
non-cancelable  operating  leases are  expected  to be  approximately  $603,000,
$620,000,  and  $558,000,  excluding  sub-lease  income,  for the  years  ending
December 31, 1999, 2000, and 2001,  respectively.  The Company's rent expense is
expected to be reduced by approximately  $129,000 in 1999 in connection with the
subleases.

Year 2000

     Year 2000 issues arise  because  most  computer  systems and programs  were
designed  to handle only a two-digit  date code for the year,  not a  four-digit
code. Thus, the Year 2000 could be interpreted as the year 1900 by such computer
systems and  programs,  resulting in the  incorrect  processing  of data.  CIC's
software products as developed


                                       20
<PAGE>
and distributed by CIC are not date sensitive and therefore Year 2000 issues are
not applicable to such products. The Company has evaluated its internal software
programs  and  equipment  to ascertain  the  readiness of computer  software and
operating systems for the Year 2000. Management of the Company believes that its
internal software programs are Year 2000 compliant.  The Company is currently in
the  process  of  replacing  older  desktop  PC's  which are not,  nor cannot be
upgraded to be, Year 2000  compliant.  The  replacement  of such older  computer
equipment  will be  completed by April 30,  1999.  The cost of  replacing  these
desktop  systems is not expected to be  significant  The Company is not aware of
any other problems.

     The  Company is in the  process of  analyzing  the  readiness  of the third
parties  with  which  it does  business.  The  Company  believes  that  the only
potentially  significant  Year 2000 problems it may experience  will result from
Year 2000 issues  affecting  its website or its banks.  The Company  generates a
significant  percentage  of  revenues  from sales made via its  website.  If the
Company's  website  were to go off-line for an extended  period of time,  income
would be  significantly  impacted  until service was  restored.  The Company has
received assurances that its website is Year 2000 compliant, however, it has not
received  any  information  regarding  the phone  carrier that links the website
server to the internet.  The Company believes that it is not possible to develop
a contingency  plan at this time for dealing with the potential  effects of such
an event. If banking systems were to fail due to Year 2000 problems, the Company
may be cut off  from  access  to some of its  funds  for a period  of time.  The
Company  maintains  its cash  with  various  financial  institutions  so that an
incident at any one bank would not have a severe  impact on the  Company's  cash
availability.

Volatility of Stock Price

     The Company's  stock price may be subject to  significant  volatility.  The
public stock markets have experienced  significant volatility in stock prices in
recent  years.  The  stock  prices  of  technology  companies  have  experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or  disproportionate  to the operating  performance of such companies.
The  trading  price of the  Company's  Common  Stock  could be  subject  to wide
fluctuations in response to, among other factors,  quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors,  announcements of new strategic relationships
by the Company or its competitors,  general  conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.

Item 8. Financial Statements and Supplementary Data

     The Company's audited consolidated financial statements for the years ended
December 31, 1998, 1997 and 1996 begin on page F-1 of this Annual Report on Form
10-K.

Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
        Financial Disclosure

     None

                                       21
<PAGE>
                                   PART III

Item 10. Directors and Executive Officers of the Registrant

     The following table sets forth certain information  concerning the current1
directors and executive officers of the Company as of March 29, 1999:
<TABLE>

                                                                     Year First
                                                                      Elected
Name                Age    Positions Currently Held                 or Appointed
<CAPTION>
<S>                <C>   <C>                                          <C>    
Guido DiGregorio     60    President, Chief Operating Officer            1997
                           and Director
Philip S. Sassower   59    Chairman of the Board, and Secretary          1998
                           Chairman of the Executive Committee           1997
                           Chairman of the Finance Committee             1995
                           Director                                      1994

Jess M. Ravich       41    Director                                      1998
Jeffrey Steiner      61    Director                                      1998
C.B. Sung            74    Director                                      1986
</TABLE>

1 James  Dao's term as Co-Chief  Executive  Officer  ended on June 1, 1998,  and
resigned as a director as of  February 1, 1999.  Michael  Braun was elected as a
director of the Company in June 1998 and resigned in October 1998.

     The business  experience  of each of the above  directors  for at least the
past five years includes the following:

     Guido DiGregorio was appointed as President and Chief Operating Officer and
a Director  of the Company in November  1997.  He was a partner in DH  Partners,
Inc. (a management  consultant) from 1996 to 1997. Prior to that, Mr. DiGregorio
was  recruited by a number of companies to reverse a trend of financial  losses,
serving  as  President  and  CEO of  each of the  following  companies:  Display
Technologies,  Inc. (a  manufacturer  of video data monitors) from 1994 to 1996,
Superior  Engineering  Corp. (a producer of  factory-built  gas fireplaces) from
1991 to 1993,  Proxim,  Inc. (wireless data  communications)  from 1989 to 1991,
Maxitrom Corp. (a manufacturer of computer products) from 1986 to 1989 and Exide
Electronics  (producer of computer  power  conditioning  products)  from 1983 to
1986.  From 1966 to 1983,  Mr.  DiGregorio  was employed by General  Electric in
various  management  positions,  rising to the position of General Manager of an
industrial automation business.

     Philip S.  Sassower  has been  Chairman of the Board and  Secretary  of the
Company since 1998,  Chairman of the Company's  Executive  Committee since 1997,
and Chairman of the Finance Committee since 1995. From 1997 to 1998 Mr. Sassower
served as Co-Chief  Executive  Officer of the Company.  Mr.  Sassower joined the
Company's  Board of Directors in 1994.  Since its founding in 1996, Mr. Sassower
has  been the CEO of  Phoenix  Enterprises  LLC,  a  company  which  assists  in
restructuring  and  providing  long-term  capital to business  enterprises.  Mr.
Sassower was Chairman of the Board of Newpark Resources,  Inc. (an oil field and
environmental  services  company)  from  1987 to 1996  and was  Chairman  of the
Executive Committee from 1996 to 1997. Mr. Sassower is also a general partner of
CIC Standby  Ventures,  L.P. and Phoenix Searex Associates L.P., and was general
partner of S&S Newpark Ventures, L.P. and S&S Investments until 1995. Since 1993
Mr. Sassower has been the CEO of BP Acquisition  LLC and the individual  General
Partner or President of the corporate  general  partner of BP Restaurants LP. In
July 1998,  BP  Acquisition  LLC and BP  Restaurants  LP filed  petitions  under
Chapter 11 of the United States  Bankruptcy  Code.  Since 1997 Mr.  Sassower has
been a director of SeaRex, Inc. (a developer and operator of lift boats used for
drilling in offshore waters).

     Jess M. Ravich was  elected as a Director of the Company in June 1998.  Mr.
Ravich has been the Chairman  and Chief  Executive  Officer of the U.S.  Bancorp
Libra division of the U.S. Bancorp Investments, Inc., a securities broker dealer
("USBI") since January 1999. From June 1991 to January 1999, he was the Chairman
and Chief Executive Officer of Libra Investments,  Inc. ("Libra"),  a securities
broker  dealer he founded,  which merged with USBI in January  1999.  Mr. Ravich
also is a director of Cherokee  Inc., a licensor and marketer of trademarks  and
tradenames.


                                       22
<PAGE>
     Jeffrey  Steiner was elected as a Director of the Company in June 1998.  He
has been Chairman of the Board,  Chief  Executive  Officer and a director of The
Fairchild Corporation (a company in the fields of aerospace and high technology)
since 1985 and has been President  since 1991. He also serves as Chairman of the
Board,  Chief Executive  Officer and President of Banner Aerospace  (distributor
and lessor of aircraft parts and engines) since  September 1993 and as Chairman,
Chief Executive  Officer and President of RHI Holdings,  Inc. (a holding company
of The Fairchild  Corporation) since 1988. From July 1992 through December 1993,
Mr. Steiner was a Vice Chairman of the Board of Rexnord Corporation. Mr. Steiner
was also Vice Chairman of Shared Technologies Fairchild until January 1998, when
that company was acquired by  Intermedia.  He currently  serves as a director of
the Franklin Corporation and the Copley Fund.

     C.B.  Sung became a Director of the Company in 1986.  Mr. Sung has been the
Chairman and Chief  Executive  Officer of Unison Group,  Inc. (a  multi-national
corporation   involved  in   manufacturing,   computer   systems  and   software
development,  international investment and trade) since 1986, and Unison Pacific
Corporation  since  1976.  He has been a member  of the  Board of  Directors  of
Capital  Investment  of Hawaii,  Inc.  (real  estate,  security  investing,  and
wholesale  bakery)  since 1985,  and serves on the Board of Directors of several
private companies.

      COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
the Company's officers, directors and persons who own more than ten percent of a
registered  class of the Company's  equity  securities  to file certain  reports
regarding  ownership of, and transactions in, the Company's  securities with the
Securities and Exchange  Commission (the "SEC").  These officers,  directors and
stockholders  are also  required by SEC rules to furnish the Company with copies
of all Section  16(a)  reports  that are filed with the SEC.  Based  solely on a
review  of  copies  of  such  forms   received  by  the  Company,   and  written
representations  received by the Company from  certain  reporting  persons,  the
Company  believes  that for the year ended  December 31, 1998 all Section  16(a)
reports required to be filed by the Company's executive officers,  directors and
10% stockholders were filed on a timely basis, except that Jeffrey Steiner filed
a Form 4 for the  month  of  July  three  days  late,  and  Jess  Ravich,  Guido
DiGregorio  and Craig  Hutchison  did not file Forms 5 with  respect to the year
ended December 31, 1998 on time.


                                       23
<PAGE>
Item 11. Executive Compensation

     The following table sets forth  compensation  awarded to, earned by or paid
to the Company's President,  regardless of the amount of compensation,  and each
executive  officer of the Company  serving as of  December  31, 1998 whose total
annual salary and bonus for 1998  exceeded  $100,000  (collectively,  the "Named
Executive Officers").

                           Summary Compensation Table
<TABLE>
                                                                    Long-Term
                                          Annual Compensation      Compensation
                                                                    Securities
                                                     Other Annual   Underlying
Name and Principal Position         Year    Salary   Compensation     Options
---------------------------         ----    ------   ------------     -------
<CAPTION>
<S>                               <C>   <C>           <C>          <C>            
Guido DiGregorio(1)...............  1998  $ 180,000          -             - 
 President and Chief                1997     22,375          -       600,000 (2)
 Operating Officer 
Philip S. Sassower................  1998  $ 150,000(4)       -        15,000 (5)
 Chairman of the Board
 and Secretary                      1997    150,000(4)       -             -
                                    1996    100,000(4)       -             -
James Dao(3)......................  1998  $ 196,329          -             -
 Former Co-Chief Executive Officer  1997    213,811     $7,477(6)          -
                                    1996    199,700      7,305(6)          -
</TABLE>


-----------

(1)       In November 1997, Mr.  DiGregorio was appointed as the Company's  
          President and Chief Operating  Officer,  and is currently paid a 
          salary at the annualrate of $180,000. See "Certain Relationships and 
          Related Transactions.

(2)       Mr.  DiGregorio  surrendered these options on January 12, 1999 when he
          received a new grant of 1,800,000 options.

(3)       Mr. Dao's term as Co-Chief  Executive  Officer  ended on June 1, 1998,
          and he resigned as a director as of February 1, 1999.


(4)       Represents  the  amount  paid to Phoenix  Enterprises  LLC(`Phoenix"),
          which  is  100%  owned  by  Mr.  Sassower,  pursuant  to a  consulting
          agreement  entered into in 1996 (See "Item 13.  Certain  Relationships
          and Related  Transactions"  below).  Mr.  Sassower  has not received a
          salary for his services as an officer of the Company in the past.  For
          1999,  $75.000 will be paid to Phoenix and $75,000 will be paid to Mr.
          Sassower.

(5)       Mr.  Sassower  received these options in his capacity as a Director of
          the Company. See "Certain Relationships and Related Transactions.

(6)       Includes  the  estimated  economic  benefit  received by Mr. James Dao
          related to a life insurance policy, the premiums of which were paid by
          the  Company  ($5,857 for 1997 and $5,465 for 1996) and the cost of an
          automobile lease.

                                       24
<PAGE>
                              Option Grants in 1998

     The following table sets forth certain information  concerning the grant of
stock options in 1998 to the Named Executive Officers.
<TABLE>

                                                          Potential Realizable
                         Percentage of                      Value at Assumed
                                                                 Annual
                        Total Options                      Rates of Stock Price
                            Granted to                         Appreciation 
                 Options  Employees in Exercise Expiration  for Option Term(1)
Name             Granted     1998       Price      Date         5%       10%            
----              -------     ----      --------    ----     ------------------
<CAPTION>
<S>              <C>         <C>       <C>     <C>         <C>      <C>
                                                                                     
Guido DiGregorio...     -       -           -        -             -         -
Philip S.Sassower..15,000       1%        $1.09   7/20/05     $5,561   $15,512
James Dao (2)......     -       -           -        -             -         -
</TABLE>

-----------

(1)    On July 20,  1998 (the date of  grant),  the  closing  sale  price of the
       Common Stock on the Nasdaq SmallCap  Market was $1.09 per share.  Assumes
       that such closing price of the Common Stock appreciates in value from the
       date of grant to the end of the option term at the annualized rates of 5%
       and 10%, respectively.

(2)    Mr. Dao's term as Co-Chief  Executive  Officer  ended on June 1, 1998,
       and he resigned as a director as of February 1, 1999.  ceased to be an
       officer of the Company as of June 1, 1998.

          Aggregate Option Exercises in 1998 and Year-End Option Values

     The following  table sets forth certain  information  concerning  the Named
Executive  Officers with respect to the exercise of options in 1998,  the number
of shares covered by exercisable and unexercisable stock options at December 31,
1998 and the aggregate  value of exercisable  and  unexercisable  "in-the-money"
options at December 31, 1998.
<TABLE>

                                     Number of Securities
                                    Underlying Unexercised
                                      Options at Fiscal   Value of Unexercised
                    Shares                 Year-End       In-The-Money Options
                   Acquired             Exercisable(E)/   at Fiscal Year-End(1)
                      On       Value   Unexercisable(U)      Exercisable(E)/
Name               Exercise   Realized                      Unexercisable(U)
<CAPTION>
<S>               <C>          <C>     <C>              <C>    

Guido DiGregorio.     -             -     216,660(E)/            $-(E)/
                                          383,340(U)              -(U)   
                                                                                                      
Philip S. Sassower.   -             -     175,000(E)/       $37,500(E)/
                                           15,000(U)              -(U)
James Dao (2)......   -             -   1,320,000(E)/      $330,000(E)/
                                                -(U)              -(U)
</TABLE>

-----------


(1)       Determined by using the  difference  between the closing sale price of
          the Common Stock on the Nasdaq SmallCap Market as of December 31, 1998
          and the exercise price of such options.

(2)       Mr. Dao's term as Co-Chief  Executive  Officer  ended on June 1, 1998,
          and he resigned as a director as of February 1, 1999.  ceased to be an
          officer of the Company as of June 1, 1998.

                                       25
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management

     The  following  table  sets  forth  information  as of March 29,  1999 with
respect to the beneficial ownership of (i) any person known to be the beneficial
owner of more than 5% of any class of voting  securities  of the  Company,  (ii)
each director of the Company,  (iii) each of the current  executive  officers of
the Company  named in the  Summary  Compensation  Table of this Proxy  Statement
under the heading "Executive  Compensation" and (iv) all directors and executive
officers of the Company as a group.
<TABLE>

                                                    Common Stock
  Name                                           Number        Percent
  of Beneficial Owner                          of Shares      of Class
<CAPTION>
<S>                                         <C>                <C>    

  Philip Sassower(1).......................   11,688,519          14.7
  CIC Standby Ventures, L.P.(2)............    9,000,000          11.3
  Guido DiGregorio(3)......................      150,000             *
  C. B. Sung(4)............................      618,823             *
  Jeffrey Steiner(5).......................       50,000             *
  Jess M. Ravich(6)........................    1,428,773           1.8
  All directors and executive officers 
  as a group (5 persons)...................   16,242,085          19.8
-----------
</TABLE>

*        Less than 1%.

(1)    The number of shares of Common Stock  includes (a) 1,025,253  shares held
       by Mr. Sassower, (b) 9,000,000 shares held by CIC Standby Ventures, L.P.,
       a Delaware limited  partnership of which Mr. Sassower is the sole general
       partner  ("Standby  Ventures"),  as reflected  in the table,  (c) 113,251
       shares beneficially owned by the Philip S. Sassower 1996 Grantor Retained
       Annuity  Trust and  72,804  shares  beneficially  owned by the  Philip S.
       Sassower 1998 CIC Standby  Ventures,  L.P. Grantor Retained Annuity Trust
       (together, the "Grantor Trusts"), two trusts in which Mr. Sassower is the
       sole trustee,  (d)  1,178,515  shares held by the Philip S. Sassower 1996
       Charitable  Remainder  Annuity  Trust  (the  "1996  CRAT"),  of which Mr.
       Sassower  and his wife are  co-trustees,  (e) 63,000  shares  held by the
       Susan O. Sassower Trust (the "Spouse's Trust"), of which Mr. Sassower and
       his  wife are  co-trustees,  and (f)  308,500  shares  issuable  upon the
       exercise of stock  options  held by Mr.  Sassower  which are  exercisable
       within  60  days of  March  31,  1999.  Mr.  Sassower  may be  deemed  to
       beneficially own the shares of Common Stock held by Standby Ventures, the
       Grantor Trusts, the 1996 CRAT and the Spouse's Trust. The number excludes
       shares owned,  directly or indirectly,  by Mr.  Sassower's wife, Susan O.
       Sassower. Mr. Sassower disclaims beneficial ownership of the shares owned
       by his wife. The business address of Mr. Sassower is Phoenix  Enterprises
       LLC,  135 East 57th Street,  12th Floor,  New York,  New York 10022.  Mr.
       Sassower is the Chairman of the Board and  Secretary  of the Company,  as
       well as Chairman of the Executive and Finance Committees of the Company's
       Board of Directors.

(2)    Mr. Sassower is the sole general  partner of Standby  Ventures and may be
       deemed to  beneficially  own the  shares of Common  Stock held by Standby
       Ventures.  The  business  address  of  Standby  Ventures  is c/o  WinSass
       Corporate  Services  LLC, 314 West Main,  Suites 3&5,  Lewisville,  Texas
       75057.

(3)    Represents  150,000  shares of Common Stock issuable upon the exercise of
       stock options which are exercisable within 60 days of March 31, 1999. The
       business  address of Mr.  DiGregorio is 275 Shoreline  Drive,  Suite 500,
       Redwood Shores, California 94065.

(4)    Includes  (a) 363,717  shares held by the Sung Family  Trust of which Mr.
       Sung is a trustee,  (b) 10,106 shares held by the Sung-Kwok Foundation of
       which Mr. Sung is the  Chairman  and (c) 245,000  shares of Common  Stock
       issuable  upon the  exercise  of stock  options  or  warrants  which  are
       exercisable  within 60 days of March 31, 1999.  Mr. Sung may be deemed to
       beneficially  own  the  shares  held by the  Sung  Family  Trust  and the
       Sung-Kwok  Foundation.  The  business  address  of Mr.  Sung is c/o Sandy
       Williams, UNISON Group, 651 Gateway Boulevard, #880, South San Francisco,
       California 94080.

                                       26
<PAGE>
(5)    The number of shares of Common Stock  represents  50,000 shares  issuable
       upon the  exercise  of options  which are  exercisable  within 60 days of
       March 31,  1999.  Mr.  Steiner's  business  address is c/o The  Fairchild
       Corporation, P.O. Box 10803, Chantilly, Virginia 20153.

(6)    The number of shares of Common Stock  includes (a) 1,187,890  shares held
       by the Ravich Revocable Trust of 1989 (the "Ravich Trust"),  of which Mr.
       Ravich is the trustee,  (b) 190,883 shares  issuable upon the exercise of
       warrants which are  exercisable  within 60 days of March 31, 1999 held by
       the Ravich Trust. (c) 50,000 shares issuable upon the exercise of options
       which  are  exercisable  within  60 days of March  31,  1999  held by Mr.
       Ravich. Mr. Ravich is a Trustee of the Ravich Trust, and may be deemed to
       beneficially  own the shares held by or issuable to the Ravich Trust. Mr.
       Ravich's  business  address  is U.S.  Bancorp  Investments,  Inc.,  11766
       Wilshire Blvd., Suite 870, Los Angeles, California 90025.

Item 13. Certain Relationships and Related Transactions

     Directors,  and Executive  Officers.  In January 1996, the Company retained
Mr. Philip  Sassower,  then member of the Board of Directors and Chairman of the
Finance  Committee,  as  a  financial  consultant  for  financial  and  investor
relations matters. Pursuant to such consulting arrangement, Phoenix Enterprises,
LLC,("Phoenix"),  a company wholly-owned by Mr. Sassower,  was paid an aggregate
of $100,000 in 1996 by the Company. In 1997, Mr. Sassower became Chairman of the
Company's  Executive Committee and Co-Chief Executive Officer of the Company and
increased his time  commitments to the Company.  To compensate Mr.  Sassower for
his  additional  time  commitments  and to  reimburse  him  for  certain  office
expenses,  the Company  increased the consulting  fees to be paid to Phoenix for
1997 to  $150,000.  In 1998,  the  office  of  Co-Chief  Executive  Officer  was
abolished  and Mr.  Sassower  became  Chairman  of the  Board of  Directors  and
Secretary.  Phoenix was paid a consulting  fee of $150,000 for 1998. As of 1999,
$75,000 of the consulting  fees will be paid to Phoenix and $75,000 will be paid
to Mr. Sassower, individually.

     In April  1994,  the Company  loaned  $210,000  to Mr.  James Dao,  then an
officer and  director of the Company,  pursuant to a  promissory  note due April
1,1996  which bore  interest  at the highest  marginal  rate  applicable  to the
Company's  borrowing or the highest rate allowable by law,  whichever was lower.
In 1996, the due date of the  promissory  note was extended to April 1, 1998. On
August 14, 1998, while Mr. Dao was still a director of the Company,  the Company
entered into an agreement  (the  "Agreement")  with Mr. Dao. Under the Agreement
the Mr. Dao will provide consulting services to the Company through December 15,
2001. In exchange for his services  $110,000 of the note  receivable be forgiven
on a monthly  basis  over the  period  commencing  August  15,  1998 and  ending
December  15,  2001.  The  remaining,  $100,000 of the note  receivable  will be
forgiven on December  15, 2001 if Mr. Dao  performs  all the  required  services
under the  Agreement.  The Agreement  will  terminate on December 15, 2001.  The
promissory note is secured by 103,450 shares of Common Stock owned by Mr. Dao.

        On January 12,  1999,  for  services  rendered,  the Board of  Directors
approved  non-qualified  stock  option  grants to Mr. Guido  DiGregorio  and Mr.
Philip  Sassower to purchase  1,800,000  and  1,602,000  shares of common stock,
respectively,.  The options  price per share is $0.75 and the options  will vest
over  three  years  pro rata on a  quarterly  basis.  In  connection  with  this
issuance, Mr.DiGregorio surrendered the 600,000 options granted to him in 1997.

     On January 27, 1999, the Board of Directors  approved  non-qualified  stock
option grants to purchase  20,000  shares of the  Company's  common stock to Mr.
Ravich and Mr.  Steiner.  In addition  Mr. Sung was granted  options to purchase
10,000 shares of the Company's  common stock.  The options vest  immediately and
have a seven year life. The option price on the date of grant was $1.03.

                                       27
<PAGE>
                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

                          Index to Financial Statements

                                                                          Page
  (a)(1) Financial Statements
         Report of PricewaterhouseCoopers LLP, Independent Accountants.    F-1
         Consolidated Balance Sheets at 
          December 31, 1998 and 1997...................................    F-2
         Consolidated Statements of Operations for 
          the years ended December 31, 1998, 1997, and 1996............    F-3
         
         Consolidated Statements of Changes in 
          Stockholders' Equity (Deficit) for the 
          years ended December 31, 1998, 1997 and 1996.................    F-4
         
         Consolidated Statements of Cash Flows for the 
         years ended December 31, 1998, 1997 and 1996..................    F-5
         
         Notes to Consolidated Financial Statements....................    F-6
  (a)(2) Financial Statement Schedule
         Schedule II Valuation and Qualifying Accounts and Reserves....    S-1

(b) Reports on Form 8-K

     None

                                       28
<PAGE>
(c) Exhibits

   Exhibit     Document
   Number

          2.0 Second Amended Plan of Reorganization of the Company, incorporated
              herein by reference to the  Company's  Form 8-K filed  October 24,
              1994.
          2.1 Orderly  Liquidation  Valuation,  Exhibit F to the Second  Amended
              Plan of  Reorganization,  incorporated  herein by reference to the
              Company's Form 8-K filed October 19, 1994.
          2.2 Order Confirming Plan of  Reorganization,  incorporated  herein by
              reference to the Company's Form 8-K filed November 14, 1994.
          3.1 Certificate  of   Incorporation   of  the  Company,   as  amended,
              incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4
              to the  Company's  Registration  Statement  on Form 10  (File  No.
              0-19301).
          3.2 Certificate   of  Amendment  to  the  Company's   Certificate   of
              Incorporation  (authorizing  the  reclassification  of the Class A
              Common  Stock  and Class B Common  Stock  into one class of Common
              Stock) as filed with the Delaware  Secretary of State's  office on
              November 1, 1991, incorporated herein by reference to Exhibit 3 to
              Amendment  1 on  Form  8 to  the  Company's  Form  8-A  (File  No.
              0-19301).
          3.3 By-laws of the  Company  adopted on October 6, 1986,  incorporated
              herein by reference to Exhibit 3.5 to the  Company's  Registration
              Statement on Form 10 (File No. 0-19301).
          4.1 1984 Stock Option Plan of the Company,  as amended and restated as
              of  October  15,  1987  and  as  amended  by  resolutions  of  the
              stockholders  of the Company passed on August 15, 1989 and October
              8, 1990 to  increase  the  aggregate  shares  covered  thereby  to
              1,000,000,  incorporated herein by reference to Exhibit 4.4 to the
              Company's Registration Statement on Form 10 (File No. 0-19301).
          4.2 Form  of  Stock   Option  Grant  under  1984  Stock  Option  Plan,
              incorporated  herein by reference to Exhibit 4.5 to the  Company's
              Registration Statement on Form 10 (File No. 0-19301).
          4.3 1991 Stock  Option  Plan of the  Company,  incorporated  herein by
              reference to Exhibit 4.5 of the Company's  Form S-1 dated December
              23, 1991 (Registration No. 33-43879).
          4.4 1991 Non-Discretionary  Stock Option Plan,  incorporated herein by
              reference to Exhibit 4.6 of the Company's  Form S-1 dated December
              23, 1991 (Registration No. 33-43879).
          4.5 Form of Incentive Stock Option Grant under 1991 Stock Option Plan,
              incorporated  herein by reference to Exhibit 4.7 of the  Company's
              Form S-1 dated December 23, 1991 (Registration No. 33-43879).
          4.6 Form of  Non-Qualified  Stock Option Grant under 1991 Stock Option
              Plan,  incorporated  herein by  reference  to  Exhibit  4.8 of the
              Company's  Form S-1 dated  December  23,  1991  (Registration  No.
              33-43879).
          4.7 Form of Stock  Option  Grant  under 1991  Non-Discretionary  Stock
              Option  Plan,  incorporated  herein by reference to Exhibit 4.9 of
              the Company's Form S-1 dated December 23, 1991  (Registration  No.
              33-43879).
          4.8 1994  Stock  Option  Plan,  incorporated  herein by  reference  to
              Exhibit G of the Company's  Second  Amended  Disclosure  Statement
              filed  on  Form  8-K  dated  October  19,  1994  and  approved  by
              shareholders on November 14, 1994.
          4.9 Form of Warrant of the  Company  dated  March 28,  1997  issued in
              connection  with the  Waiver  by and  among  the  Company  and the
              signatories  thereto,  incorporated herein by reference to Exhibit
              4.9 of the Company's 1996 Form 10-K (File No. 0-19301).
         10.1 License  Agreement  effective July 1, 1990 between the Company and
              NCR GmbH,  incorporated herein by reference to Exhibit 10.5 to the
              Company's Registration Statement on Form 10 (File No. 0-19301).
         10.2 Description of Termination  Agreement with James Dao, incorporated
              herein by reference to Exhibit 10.11 to the Company's Registration
              Statement on Form 10 (File No. 0-19301).
         10.3 License  Agreement  dated  October 1, 1991 between the Company and
              Samsung Electronics Co., Ltd., incorporated herein by reference to
              Exhibit  10.9 of the  Company's  Form S-1 dated  December 23, 1991
              (Registration No. 33-43879).

                                       29
<PAGE>
        +10.4 License  Agreement dated June 16, 1992 between the Company and NEC
              Corporation,  incorporated herein by reference to Exhibit 10.12 of
              the Company's 1992 Form 10-K (File No. 0-19301)
        +10.5 Licensing  and  Development  Agreement  for Use and  Marketing  of
              Program Materials dated September 25, 1992 between the Company and
              International  Business Machines Corporation,  incorporated herein
              by  reference  to Exhibit  10.13 of the  Company's  1992 Form 10-K
              (File No. 0-19301)
        +10.6 OEM License  Agreement dated December 15, 1992 between the Company
              and Seiko-Epson  Corporation,  incorporated herein by reference to
              Exhibit 10.14 of the Company's 1992 Form 10-K (File No. 0-19301)
        *10.7 OEM  Agreement  dated  August 13, 1993 between  CalComp,  Inc. and
              the Company,  incorporated  herein by  reference  to Exhibit 10.13
              of the Company's 1993 Form 10-K (File No. 0-19301)
         10.8 Standby Stock  Purchase  Agreement  between the Company and Philip
              Sassower dated October 3, 1994,  incorporated  herein by reference
              to  Exhibit  10.13 of the  Company's  1994  Form  10-K  (File  No.
              0-19301)10.9Engagement   Letter  between  the  Company  and  Libra
              Investments,  Inc. dated November 2, 1995,  incorporated herein by
              reference to Exhibit 1 of the  Company's  Form 8-K dated  November
              28, 1995.
        10.10 Form  of  Subscription  Agreement  between  the  Company  and  the
              Purchasers,  dated  November  28,  1995,  incorporated  herein  by
              reference to Exhibit 1 of the  Company's  Form 8-K dated  November
              28, 1995.
        10.11 Form of Registration  Rights Agreement between the Company and the
              Purchasers,  dated  November  28,  1995,  incorporated  herein  by
              reference to Exhibit 1 of the  Company's  Form 8-K dated  November
              28, 1995.
        10.12 Form of Warrant of the Company issued to Libra  Investments,  Inc.
              on November 28, 1995,  incorporated herein by reference to Exhibit
              1 of the Company's Form 8-K dated November 28, 1995.
        10.13 Form of  Registration  Rights  Agreement  between  the Company and
              Libra  Investments,  Inc.,  dated November 28, 1995,  incorporated
              herein by reference to Exhibit 1 of the  Company's  Form 8-K dated
              November 28, 1995.
        10.14 Form of  Subscription  Agreement  between  the Company and various
              investors,  dated June 13, 1996,  incorporated herein by reference
              to Exhibit 1 of the Company's Form 8-K dated June 27, 1996.
        10.15 Form of  Registration  Rights  Agreement  between  the Company and
              various  investors,  dated June 13, 1996,  incorporated  herein by
              reference  to Exhibit 2 of the  Company's  Form 8-K dated June 27,
              1996.
        10.16 Form of Preferred Stock Investment Agreement, dated as of December
              31, 1996, between the Company and the investors listed on Schedule
              1 thereto,  incorporated  herein by  reference to Exhibit 1 of the
              Company's Form 8-K dated December 31, 1996.
        10.17 Form of Registration  Rights Agreement between the Company and the
              Investors  Listed on  Schedule 1 thereto,  incorporated  herein by
              reference to Exhibit 2 of the  Company's  Form 8-K dated  December
              31, 1996.
        10.18 Form of  Certificate of Designation of the Company with respect to
              the 5% Cumulative Convertible Preferred Stock, incorporated herein
              by reference to Exhibit 3 of the Company's Form 8-K dated December
              31, 1996.
        10.19 Waiver,  dated March 26, 1997, effective December 31, 1996, by and
              among the Company and the signatories thereto, incorporated herein
              by  reference  to Exhibit  10.19 of the  Company's  1996 Form 10-K
              (File No. 0-19301).
        10.20 Form of  Subscription  Agreement  between  the  Company  and  each
              subscriber,  dated as of November 25, 1997, incorporated herein by
              reference to Exhibit 10.1 of the Company's Form 8-K dated December
              3, 1997.
        10.21 Certificate  of  Designations  of the Company  with respect to the
              Series B 5% Cumulative  Convertible Preferred Stock,  incorporated
              herein by  reference  to Exhibit  10.2 of the  Company's  Form 8-K
              dated November 13, 1997.
        10.22 Form of Registration  Rights  Agreement,  by and among the Company
              and the  signatories  thereto,  dated  as of  November  25,  1997,
              incorporated  herein by reference to Exhibit 10.3 to the Company's
              Form 8-K dated November 13, 1997.

                                       30
<PAGE>
      **10.23 Amendment to the Company's Certificate of Designation with respect
              to the 5% Cumulative  Convertible  Preferred  Stock dated June 12,
              1998.
      **10.24 Amendment to the  Company's  Amended and Restated  Certificate  of
              Incorporation dated June 12, 1998.
      **10.25 Agreement dated August 14, 1998 between James Dao and the Company.
    ++**10.26 Software  Development and License Agreement dated December 4, 1998
              between Ericsson Mobile Communications AB and the Company.
       **21.1 Schedule of Subsidiaries.
       **23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
       **27.1 Financial Data Schedule.

-----------

+        Confidential  treatment  of certain  portions of this exhibit have been
         previously  granted  pursuant  to a request for  confidentiality  dated
         March 29, 1993, filed pursuant to the Securities Exchange Act of 1934.

*        .Confidential  treatment of certain  portions of this exhibit have been
         previously  granted  pursuant  to a request for  confidentiality  dated
         March 30, 1994, filed pursuant to the Securities Exchange Act of 1934.

**       Filed herewith.

++       Confidential  treatment  of certain  portions of this exhibit have been
         requested from the SEC pursuant to a request for confidentiality  dated
         March 30, 1999, filed pursuant to the Securities Exchange Act of 1934.

                                       31
<PAGE>


20
                                       
                        Report of Independent Accountants


To the Board of Directors and Stockholders of
Communication Intelligence Corporation

     In our opinion,  the consolidated  financial statements listed in the index
appearing  under  Item  14(a)  (1) and (2) of this  Annual  Report  on Form 10-K
present  fairly,   in  all  material   respects,   the  financial   position  of
Communication  Intelligence  Corporation and its subsidiaries (the "Company") at
December 31, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1998,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.


PRICEWATERHOUSECOOPERS  LLP



San Jose, California
March 29, 1999


                                      F-1
<PAGE>
                     Communication Intelligence Corporation
                           Consolidated Balance Sheets
                    (In thousands, except par value amounts)

<TABLE>

                                                           December 31,
                                               ---------------------------------
                                                       1998              1997
                                               ---------------------------------
<CAPTION>
<S>                                           <C>               <C>    
 Assets
 Current assets:
   Cash and cash equivalents.................    $      795        $    5,485
   Restricted cash...........................           250                 -
   Accounts receivable, net
    of allowances of $174 and $46 at
   December 31, 1998 and 
    1997, respectively.......................         1,146               362
   Inventories...............................            74               193
   Prepaid expenses and other
    current assets...........................           103               175
                                               ---------------   ---------------

         Total current assets................         2,368             6,215

 Note receivable from officer................           200               210
 Property and equipment, net.................           539               798
 Other assets................................           247               268
                                               ---------------   ---------------


         Total assets........................    $    3,354        $    7,491
                                               ===============   ===============

 Liabilities and Stockholders' Equity
 Current liabilities:
   Accounts payable..........................    $      473        $    1,059
   Short-term debt...........................           145               490
   Accrued compensation......................           229               446
   Other accrued liabilities.................           524             1,059
   Deferred revenue..........................           651               440
                                               ---------------   ---------------
         Total current liabilities...........         2,022             3,494

 Other liabilities...........................             -                 8
                                               ---------------   ---------------
                                                      2,022             3,502
                                               ---------------   ---------------
 Commitments (Note 7)........................

 Stockholders' equity:
   Convertible preferred stock, $.01 par 
    value; 10,000 shares authorized;
    none and 569 issued and outstanding 
    at December 31, 1998 and 1997 (Note 5)...             -                 6
   Common stock, $.01 par value; 100,000
    shares authorized; 78,459
    and 47,430 shares issued and 
    outstanding at December 31, 1998             
    and 1997, respectively...................           785               474
   Additional paid-in capital................        70,205            69,955
   Accumulated deficit.......................       (69,504)          (66,347)
   Accumulated other comprehensive loss......          (154)              (99)
                                               ---------------   ---------------
 Total stockholders' equity (Note 5).........         1,332             3,989
                                               ---------------   ---------------
    Total liabilities and
      stockholders' equity (Note 5)..........    $    3,354        $    7,491
                                               ===============   ===============
</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                      F-2

<PAGE>
                     Communication Intelligence Corporation
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)
<TABLE>

                                               Years ended December 31,
                                     -------------------------------------------
                                           1998           1997          1996
                                     -------------------------------------------
<CAPTION>
<S>                                   <C>           <C>           <C>    

 Revenues:
   Product..........................    $    2,982     $  3,246      $    1,591
   License and royalty..............         1,300        1,842             816
   Development contracts............           298          428             480
                                     -------------------------------------------
                                             4,581        5,516           2,887
                                     -------------------------------------------
 Operating costs and expenses:
    Cost of sales:
      Product.......................         1,698        5,458           1,894
      License and royalty...........            63          132             182
      Development contracts.........           212          273             355
    Research and development........         1,989        2,360           1,672
    Sales and marketing.............         2,015        6,257           3,282
    General and administrative......         1,889        2,663           2,037
                                     -------------------------------------------

                                             7,866       17,143           9,422
                                     -------------------------------------------

 Loss from operations................       (3,285)     (11,627)         (6,535)

 Interest income and other income 
 (expense), net......................          147         (322)            278
 Interest expense....................          (19)         (51)            (99)
                                     -------------------------------------------

 Net loss............................       (3,157)     (12,000)         (6,356)

 Embedded yield on preferred 
 stock (Note 5)......................            -       (4,376)              -
 Preferred stock dividends (Note 5)..         (435)        (564)              -
                                     -------------------------------------------

 Net loss available to 
 common stockholders.................   $   (3,592)    $(16,940)     $   (6,356)
                                     ===========================================

 Basic and diluted loss per
 common share ......................    $    (0.06)    $  (0.37)     $    (0.15)
                                     ===========================================


 Weighted average common shares.....        56,233       45,370          41,265
                                     ===========================================
</TABLE>

           See accompanying Notes to Consolidated Financial Statements


                                      F-3
<PAGE>
                     Communication Intelligence Corporation
      Consolidated Statements of Changes in Stockholders' Equity (Deficit)
                                 (In thousands)
<TABLE>

                     Series  Series
                        A      B                                Accum.
                       Convertible         Additional  Accum.   Other
                      Preferred   Common  Paid-In    Deficit Comprehen.Comprehen
                      Stock   Stock  Stock  Capital             Loss      Loss
<CAPTION>
<S>                  <C>    <C>  <C>     <C>       <C>        <C>  <C>



Balances as of
 December 31, 1995..   $  -   $ -  $ 400   $51,687   $(47,991)   $ (86)


Exercise of options 
  for 1,403shares 
  of Common Stock.....    -      -      14       664    -         -
Exercise of warrants
  for 100shares
  of Common Stock....     -      -       1        49    -         -
Issuance of 796 
  shares of Common Stock
  to investors for cash,
  net of issuance costs
  of $292...              -      -       8     2,400    -         -
Exchange of 390 shares 
  of CommonStock for 70
  shares of redeemable
  convertible                  
  preferred stock....     -      -      (4)   (1,751)   -         -
Issuance of warrants 
  to purchase
  Common Stock in 
connection with
  the June and December
  Private             
  Placements...........   -      -       -       844    -         -
Issuance of 100 options
  to consultants
  for services........    -      -       -       122    -         -
Net loss.............     -      -       -         -  (6,356)     -    $ (6,356)
Foreign currency 
translationadjustment.    -      -       -         -       -    (83)        (83)
                                                                      ----------
Comprehensive Loss                                                    $  (6,439)
                        --------------------------------------------  ==========
Balances as of
December 31, 1996..       -      -     419    54,015 (54,347)  (169)
Exercise of options
  and warrants
  for 3,092 shares 
  of Common Stock         -      -      31       135       -      -
Issuance of 50 options
  to consultants
  for services........    -      -       -        75       -      -
Conversion of redeemable
  convertible
  preferred stock
  into 450 shares 
  of Series A               
 Preferred Stock......     5     -       -     9,412       -      -
Issuance of warrants to
  purchase 300 shares 
  of Common Stock in
  connection with 
  the waiver of
  redemption rights
  on Series A             
  Preferred Stock....      -     -       -       484       -      -
Conversion of 121 shares
  of Series A Preferred 
  Stock into 2,437 shares
  of Common Stock....     (1)    -      24       (23)      -      -
Issuance of 240 Series B
  Preferred Stock, net of                
  issuance costs of $141.. -     2       -     5,857       -      -
Net loss.................. -     -       -         - (12,000)     -    $(12,000)
Foreign currency translation               
  adjustment.............. -     -       -         -       -     70          70
                                                                       ---------
Comprehensive loss                                                     $(11,930)
                         --------------------------------------------  =========
Balances as of
 December 31, 1997........ 4     2     474    69,955 (66,347)   (99)

Conversion of 329 shares
  of Series A 
  Preferred Stock into
  18,598 shares of Common   
  Stock...               (4)     -     186      (182)      -      -
Conversion of 240 shares
  of Series B
  Preferred Stock into
  11,384 shares of 
  Common Stock...         -     (2)    114      (112)      -      -
Exercise of options 
  for 1,126
  shares of Common Stock. -      -      11       511       -      -
Accelerated vesting 
  of 40 options                                             
  to consultants for               
  services..............  -      -       -        33       -      -
Net loss................  -      -       -         -  (3,157)     -    $ (3,157)
Foreign currency
 translation adjustment.. -      -       -         -       -    (55)        (55)             
                                                                       ---------
Comprehensive loss                                                     $ (3,212)
                         --------------------------------------------  =========
Balances as of
 December 31, 1998..    $-    $  -   $ 785   $70,205 $(69,504)$(154)
                         =======================================================
</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                      F-4
<PAGE>
                     Communication Intelligence Corporation
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>

                                                 Years ended December 31,
                                         ---------------------------------------
                                             1998          1997          1996
                                         ---------------------------------------
<CAPTION>
<S>                                     <C>          <C>         <C>    
 Cash flows from operating activities
 Net loss...............................  $ (3,157)    $  (12,000)  $  (6,356)
 Adjustments to reconcile net loss
 to net cash used in operating
 activities:
   Depreciation and amortization........       327            347         353
   Warrant issuance costs...............         -            484           -
   Equity securities issued for 
   services.............................        33             75         122
   (Gain) loss on disposal of property
   and equipment........................       ( 2)            32           -
    Changes in operating assets 
    and liabilities:
     Accounts receivable, net...........      (784)            15           5
     Inventories........................       119            317        (284)
     Prepaid expenses and other
     current assets.....................        72             15         209
     Other assets.......................       (12)           (32)        213
     Accounts payable...................      (586)           692         (67)
     Pre-petition liabilities...........        -            (878)       (766)
     Accrued compensation...............      (217)           107          57
     Other accrued liabilities..........      (595)           623        (285)
     Deferred revenue...................       211         (1,537)       (564)
                                         ----------- ------------- -------------
 Net cash used in operating activities..    (4,591)       (11,740)     (7,363)
                                         ----------- ------------- -------------

 Cash flows from investing activities
 Proceeds from sales and maturities 
 of short-term investments..............         -          8,782      14,276
 Purchase of short-term investments.....         -         (8,035)    (13,493)
 Acquisition of property and equipment..       (45)          (601)       (358)
 Proceeds from the sale of property 
 and equipment..........................        25              -           -
                                         ----------- ------------- -------------
 Net cash provided by (used in)
 investing activities...................       (20)           146         425
                                         ----------- ------------- -------------
 Cash flows from financing activities
 Proceeds from issuance of short-term 
debt....................................       145             525          -
 Restricted cash related to short-term
 debt...................................      (250)             -           -
 Principal payments on short-term debt..      (490)           (35)        (30)
 Principal payments on capital lease

 obligations............................       ( 6)           (11)        (34)
 Proceeds from issuance of redeemable
 convertible preferred stock
 and warrants, net of cash issuance 
 costs..................................         -              -       8,395
 Proceeds from issuance of Series B
 Convertible Preferred Stock,
 net of cash issuance costs.............         -           5,859          -
 Proceeds from exercise of
 stock options..........................       522             166          -
 Proceeds from issuance of 
 common stock and warrants, net of cash                                  
   issuance costs.......................         -               -      3,247
                                         ----------- ------------- -------------
 Net cash provided by (used in)
 financing activities...................      (79)          6,504      11,578
                                         ----------- ------------- -------------
 Effect of exchange rate changes
 on cash................................        -               2           9


 Net increase (decrease) in cash 
 and cash equivalents....................  (4,690)         (5,088)      4,649
 Cash and cash equivalents at 
 beginning of year.......................   5,485          10,573       5,924
                                         ----------- ------------- -------------
 Cash and cash equivalents at
 end of year.............................$    795      $    5,485    $ 10,573
                                         =========== ============= =============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements

                                      F-5
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies

The Company

     Communication  Intelligence  Corporation  (the "Company" or "CIC") develops
and   markets   natural   pen-input   computer    interfaces   and   handwriting
recognition-based  security  technologies  and products for the emerging markets
for pen-based  computing and electronic  commerce.  These  emerging  markets for
CIC's products  include all areas of personal  computing,  as well as electronic
commerce and communications.

     The  Company's  research  and  development  activities  have  given rise to
numerous  technologies  and  products.   The  Company's  core  technologies  are
classified  into  two  broad  categories:   "natural  input   technologies"  and
"transaction  and  communication  enabling  technologies".  CIC's  natural input
technologies are designed to allow users to interact with a computer or handheld
device through use of a pen. Such products  include the Company's  multi-lingual
Handwriter(R) Recognition System, and its Handwriter(R) for Windows(R) family of
desktop  computing  products.   CIC's  transaction  and  communication  enabling
technologies  provide  a  means  for  protecting  electronic   transactions  and
discretionary  communications.  CIC has developed products for dynamic signature
verification,  electronic  ink data  compression  and  encryption and a suite of
development tools and applications which the Company believes could increase the
functionality  of its  core  products  and  facilitate  their  integration  into
original equipment manufacturers' ("OEM") hardware products and computer systems
and networks.

     Through its  majority-owned  joint venture in China (the "Joint  Venture"),
the Company  provides  system  integration  services  and markets its  pen-based
business  computer  systems to Chinese  businesses,  government  users and other
joint ventures.

     For the  five-year  period ended  December 31, 1998,  the Company  incurred
aggregate  losses of $43, and, at December 31, 1998,  the Company's  accumulated
deficit was  approximately  $69. The Company has  primarily  funded these losses
through the sale of debt and equity securities.

     As of December 31, 1998,  the Company's  principal  source of liquidity was
its cash and cash equivalents of $795.  Although there can be no assurance,  the
Company believes that its current  resources,  together with expected  revenues,
will  provide  sufficient  funds for  planned  operations  for at least the next
twelve months. However, if the Company is unable to generate adequate cash flows
from sales,  or if  expenditures  required to achieve  the  Company's  plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary  spending.  Management  believes  that it  will be able to  reduce
discretionary spending if required.

Basis of Consolidation

     The  accompanying   consolidated   financial  statements  are  prepared  in
accordance  with  generally  accepted  accounting  principles,  and  include the
accounts of CIC and its majority-owned Joint Venture in the People's Republic of
China. All inter-company accounts and transactions have been eliminated.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

                                      F-6
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

Plan of Reorganization and Pre-Petition Liabilities

     On July 18, 1994, the Company filed a voluntary petition for reorganization
and  protection  under  Chapter  11 of the U. S.  Bankruptcy  Code in the United
States Bankruptcy Court, San Francisco District.  The Joint Venture did not file
a petition for  reorganization.  On  September  28,  1994,  the Company  filed a
Disclosure  Statement  and Plan of  Reorganization  (the  "Plan")  in the United
States  Bankruptcy Court, San Francisco  District.  The Plan was approved by the
creditors  on  November  14,  1994,  and the  Company  emerged  from  Chapter 11
protection on that date.

     The Plan  provided  for the  payment  in  full,  in  cash,  of all  allowed
unsecured  claims of creditors  while leaving  secured  creditors  unimpaired by
providing for their payment in compliance with the original terms and conditions
of their  loans.  Unsecured  creditors  were paid in three  approximately  equal
installments  in each of  February  1995,  1996 and 1997.  Pursuant to the Plan,
amounts  outstanding after February 1995 accrued simple interest at 8% per annum
through  February 1996 and 10% per annum  thereafter  through February 1997. The
Plan also approved  certain warrant  offerings and stock purchase  agreements as
described in Note 5.

Fair Value of Financial Instruments

     The carrying amounts of the Company's financial instruments, including cash
and cash  equivalents,  restricted cash, and short-term  debt,  approximate fair
value due to their short maturities.

Cash, Cash Equivalents and Short-term Investments

     The Company considers all highly liquid  investments with a maturity at the
date of purchase of three months or less to be cash equivalents.

     Short-term  investments  are  classified as  "available-for-sale."  For all
periods  presented,   cost  of  investments   approximated  fair  market  value.
Unrealized  gains and losses at December 31, 1997 and realized  gains and losses
for the years  ended  December  31, 1997 and 1996 on such  investments  were not
material.  The cost of securities  sold is based on the specific  identification
method.  The Company had no  short-term  investments  as of December 31, 1998 or
1997.

        The Company's  cash and cash  equivalents at December 31, consist of the
following:
<TABLE>

                                                       1998         1997
                                                    ----------- -------------
<CAPTION>
<S>                                             <C>          <C>    

 Cash in bank....................................  $    668     $  1,160
 Commercial paper................................       125        2,330
 Money markets...................................         2        1,004
 Corporate debt securities.......................         -          991
                                                    -------------------------

   Cash and cash equivalents.....................  $    795     $  5,485
                                                    =========================
</TABLE>

Concentrations of Credit Risk

     Financial  instruments that potentially  subject the Company to significant
concentrations  of credit risk  consist  primarily  of cash,  cash  equivalents,
restricted cash,  short-term  investments and accounts  receivable.  The Company
maintains its cash,  cash  equivalents and short-term  investments  with various
financial institutions.  This diversification of risk is consistent with Company
policy to maintain liquidity and ensure the safety of principal.

                                      F-7
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

     At December  31, 1998,  the Joint  Venture had  approximately  $724 in cash
accounts  held by a financial  institution  in the  People's  Republic of China.
Approximately  $250  of  the  Joint  Venture's  cash  was  held  by a  financial
institution as collateral at December 31, 1998 for an  outstanding  note, and is
restricted  for such  purpose  as long as the  note is  outstanding.  The  Joint
Venture deposits are not covered by any federal deposit  insurance  program that
is comparable to the programs applicable to U.S. deposits.

     To date,  accounts  receivable have been derived  principally from revenues
earned from end users,  manufacturers,  retailers and  distributors  of computer
products in North  America,  Europe and the Pacific  Rim.  The Company  performs
periodic credit evaluations of its customers,  and does not require  collateral.
The Company maintains reserves for potential credit losses;  historically,  such
losses have been insignificant and within management's expectations.

     Two  customers  accounted  for  46%  and  24%,  respectively,  of  accounts
receivable  at December 31, 1998.  One  customer  accounted  for 24% of accounts
receivable at December 31, 1997.

Inventories

     Inventories  are  stated  at the  lower  of  cost  or  market,  cost  being
determined  using the  first-in  first-out  ("FIFO")  method.  Cost  principally
includes direct materials.  At December 31, 1998 and 1997, inventories consisted
of finished goods.

     As of December 31, 1997 the Company believed that a significant  portion of
its  Handwriter(R)  inventory  would  not be  realized  in the near  term,  and,
accordingly,  the Company wrote down such inventory by  approximately  $1,600 at
December 31, 1997.

Property and Equipment, Net

     Property and equipment are stated at cost.  Depreciation  is computed using
the straight-line  method over the estimated useful lives of the related assets,
ranging from three to five years.  Leasehold  improvements  are  amortized  over
their estimated  useful lives,  not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred.

     Property and equipment, net at December 31, consists of the following:
<TABLE>

                                              1998         1997
                                          ------------ ------------
<CAPTION>
<S>                                       <C>          <C>    
 Machinery and equipment..................   $ 1,121      $  2,160
 Office furniture and fixtures............       438           535
 Leasehold improvements...................        84            99
 Purchased software.......................       130           124
                                          -------------------------
                                               1,773         2,918
 Less accumulated depreciation 
 and amortization.........................    (1,234)       (2,120)
                                          -------------------------
                                             $   539      $    798
                                          =========================
</TABLE>

     Included in property and  equipment as of December 31, 1998 and 1997 is $34
and $34,  respectively,  of assets  acquired under capital  leases.  Accumulated
depreciation  on such assets  totaled $27 and $24 at December 31, 1998 and 1997,
respectively.

                                      F-8
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

Long-Lived Assets

     The Company evaluates the  recoverability of its long-lived assets whenever
circumstances  or events  indicate  such assets might be  impaired.  The Company
would  recognize an  impairment  reserve in the event the net book value of such
assets exceeded the future  undiscounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 1998.

Software Development Costs

     The Company capitalizes  software  development costs upon the establishment
of technological  feasibility,  subject to net realizable value  considerations.
Capitalization  commences  upon the  completion  of a working  model and ends on
general  product  release.  As of December  31,  1998 and 1997,  such costs were
insignificant  and  are  included  as a  component  of  "other  assets"  in  the
accompanying  consolidated  balance  sheets.  Amortization  expense  related  to
capitalized  software  development  costs in 1998  amounted to $7.  There was no
amortization  expense related to capitalized software development costs in 1997.
Amortization  expense,  including  amounts written down to net realizable value,
was approximately $98 for 1996.

Stock-Based Compensation

     Effective  January 1, 1996,  the Company  adopted  Statement  of  Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123").  The Company has  elected to  continue to use the  intrinsic  value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.

Revenue Recognition

     In October 1997,  the American  Institute of Certified  Public  Accountants
(the  "AICPA")  issued  Statement  of  Position  No.  97-2,   "Software  Revenue
Recognition"  ("SOP  97-2"),  which the Company  has  adopted  for  transactions
entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance  for  recognizing  revenue  on  software  transactions  and  supersedes
Statement of Position No. 91-1,  "Software Revenue  Recognition." In March 1998,
the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4
defers,  for one year,  the  application  of certain  passages in SOP 97-2 which
limit  what  is  considered  vendor-specific  objective  evidence  necessary  to
recognize  revenue for software licenses in  multiple-element  arrangements when
undelivered  elements  exist.  In December 1998,  the AICPA issued  Statement of
Position  No.  98-9 ("SOP  98-9")  Modification  of SOP 97-2,  Software  Revenue
Recognition,  With  Respect  to  Certain  Transactions."  SOP 98-9  extends  the
effective date of SOP 98-4 and provides additional  interpretative guidance. SOP
98-9 is effective for fiscal years  beginning  after March 15, 1999. The Company
will determine the impact,  if any, of SOP 98-9 on current  revenue  recognition
practices when adopted. Adoption of the remaining provisions of SOP 97-2 did not
have a material impact on revenue recognition during 1998.

     Revenue from retail  product sales is recognized  upon sell through,  while
revenue from other product sales is  recognized  upon shipment  provided that no
significant obligations remain and the collection of the resulting receivable is
probable.  The  Company  provides  for  estimated  sales  returns at the time of
shipment.

                                      F-9

<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and Summary of  Significant
     Accounting Policies (continued)

     License  revenues are  recognized  when the software has been delivered and
when all significant  obligations have been met. Royalty revenues are recognized
as products are licensed/sold by licensees. Deferred revenue in the accompanying
balance sheets reflects non-recurring  engineering fees and advance royalty fees
received from the Company's licensees in advance of revenue recognition.

     Development  contracts  revenue is generated  primarily from  non-recurring
engineering activities and research grants from government agencies.  Revenue is
recognized in accordance with the terms of the grants and agreements,  generally
when collection is probable and related costs have been incurred.

     Three customers accounted for 27%, 16% and 15%,  respectively,  of revenues
in 1997. Two customers accounted for 11% and 10%,  respectively,  of revenues in
1996.  No other  customers  accounted  for greater than 10% of revenues in 1998,
1997 and 1996.

Research and Development

     Research and development costs are charged to expense as incurred.

Net Loss Per Share

     Effective  December  31,  1997,  the  Company  adopted  the  provisions  of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the disclosure of both basic earnings per share,  which
is based on the  weighted  average  number of  common  shares  outstanding,  and
diluted  earnings per share,  which is based on the weighted  average  number of
common shares and dilutive potential common shares  outstanding.  All prior year
earnings  per share data have been  restated to reflect the  provisions  of SFAS
128. Potential common shares, including outstanding convertible preferred stock,
stock options and warrants,  have been excluded from the  calculation of diluted
earnings per share for all periods  presented as their effect is  anti-dilutive.
Per  share  results  of  operations  are  reduced  by  the  amortization  of the
beneficial  conversion  rate on the Series A Preferred  Stock and the cumulative
dividend requirements earned by the preferred stockholders.

Foreign Currency Translation

     The Company considers the functional  currency of the Chinese Joint Venture
to be the local currency and, accordingly, gains and losses from the translation
of the local foreign currency  financial  statements are included as a component
of  "accumulated  other  comprehensive  loss" in the  accompanying  consolidated
balance sheets. Foreign currency assets and liabilities are translated into U.S.
dollars at the end-of-period  exchange rates except for non-monetary  assets and
liabilities,  which are translated at historical  exchange  rates.  Revenues and
expenses are  translated  at the average  exchange  rates in effect  during each
period  except for those  expenses  related to balance  sheet  amounts which are
translated at historical exchange rates.

     Net foreign currency transaction gains and losses are included in "interest
income  and  other  income  (expense),  net"  in the  accompanying  consolidated
statements  of  operations.   The  Company   recorded  a  net  foreign  currency
transaction  gain of $58, a loss of $101,  and a gain of $59 for the years ended
December 31, 1998, 1997 and 1996, respectively.

Income Taxes

     Deferred tax assets and  liabilities  are  recognized  for the expected tax
consequences  of  temporary  differences  between  the tax bases of  assets  and
liabilities and their financial  statement reported amounts and for tax loss and
credit  carryforwards.  A valuation  allowance is provided  against deferred tax
assets for which it is more likely than not that the asset will not be realized.

                                      F-10
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

2. Chinese Joint Venture

     The Company  currently  owns 90% of a joint  venture  with the  Ministry of
Electronic  Industries  of the  Jiangsu  Province,  a  provincial  agency of the
People's Republic of China (the "Agency").  In June 1998, the registered capital
of the Joint  Venture was reduced  from  $10,000 to $2,550.  As of December  31,
1998,  the Company had  contributed  an aggregate of $1,800 in cash to the Joint
Venture and provided it with non-exclusive  licenses to technologies and certain
distribution  rights and the Agency had  contributed  certain  land use  rights.
Following the reduction in registered capital of the Joint Venture,  neither the
Company nor the Agency are required to make further  contributions  to the Joint
Venture.  Prior to the reduction in the amount of registered capital,  the Joint
Venture  was  subject  to the  annual  licensing  requirements  of  the  Chinese
government.  Concurrent  with the  reduction in  registered  capital,  the Joint
Venture's business license has been renewed through October 18, 2043.

3. Comprehensive Income

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
130"). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that  all  items  recognized   under  accounting   standards  as  components  of
comprehensive earnings be reported in an annual statement that is displayed with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature in
an annual financial  statement.  For example,  other comprehensive  earnings may
include foreign  currency  translation  adjustments,  minimum pension  liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale.

     The  accumulated  other  comprehensive  loss at December  31, 1998 and 1997
consisted of cumulative translation adjustments.

4. Debt

     In June 1998, the Company's 90% owned Joint Venture borrowed the equivalent
of $145,  denominated in Chinese  currency,  from a Chinese bank. The loan bears
interest  at 9% and is due on June 30,  1999.  The  borrowings  are secured by a
$250, US dollar denominated deposit held by the bank.

     In May 1997, the Company  purchased  office furniture and a security system
with an approximate  value of $209 from a third party.  The Company paid $100 in
cash and signed an unsecured note for $109 due in monthly  installments  through
May 1998.  The note bore  interest  on the  unpaid  balance at a rate of 10% per
annum. The note was paid in full in May 1998.

     In October 1997, the Company entered into an accounts receivable  financing
agreement  whereby the Company may factor its accounts  receivable in accordance
with the terms of the  agreement.  The maximum  credit  available to the Company
under the  agreement is $1,500 with an advance rate of 80% of eligible  accounts
receivable  less than 90 days old. The term of the  agreement  is twelve  months
with  annual  renewals.  A  financing  fee of  2.1%  per  month  applies  to the
outstanding balance based on the face value of each invoice.  The line of credit
is secured by a blanket  first  priority  lien on all  Company  assets  with the
exception of  intellectual  property.  The amounts  financed  under the accounts
receivable financing agreement at December 31, 1997 were repaid in January 1998.

5. Stockholders' Equity

Private Placement

     In June 1996, the Company  completed a private placement (the "June Private
Placement") of 600 shares of the Company's Common Stock, at a price of $4.50 per
share  to  certain   institutional  and  other  investors   (collectively,   the
"Subscribers").  The net proceeds to the Company were approximately  $2,408, net
of cash  issuance  costs of $181 and $111 of value  ascribed  to 30  warrants to
purchase Common Stock issued to the placement agent. The warrants expire

                                      F-11
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Stockholders' Equity (continued)

five years from the date of  issuance  and have an  exercise  price of $4.50 per
share, subject to adjustments for anti-dilution.  The fair value ascribed to the
warrants was estimated on the date of issuance using the  Black-Scholes  pricing
model with the following assumptions: risk-free interest rate of 6.69%; expected
life of 5 years; expected volatility of 102%; and expected dividend yield of 0%.
The Company agreed to register the  securities  which were issued in conjunction
with the June  Private  Placement  and which may be issued upon  exercise of the
placements agent's warrants. The Registration Statement on Form S-3 filed by the
Company to effect the registration of these securities was declared effective on
December 24, 1996 (the "Effective Date").

     Pursuant to the June Private  Placement  agreement,  the Company  agreed to
issue  additional  shares  (the  "Extra  Shares")  of its  Common  Stock  to the
Subscribers if the average of the daily closing  prices of the Company's  Common
Stock for the  twenty  business  days  prior to two  business  days  before  the
Effective  Date was less than $4.50 per share.  In  December  1996,  the Company
issued 196 Extra Shares for no additional  consideration  to the Subscribers who
did not  exchange  the shares of Common  Stock which they  purchased in the June
Private Placement for the Company's Series A Preferred Stock (as defined below).
The  Registration  Statement on Form S-3 filed by the Company in connection with
the June Private Placement also effected the registration of the Extra Shares.

Convertible Preferred Stock

     In December 1996, the Company  completed a private placement (the "December
Private Placement") of 450 shares of redeemable convertible preferred stock (the
"Series A  Preferred  Stock") at $25.00 per share to certain  institutional  and
other  investors.  Of the  aggregate  450  shares  sold,  70  shares of Series A
Preferred  Stock  were  issued  in  exchange  for 390  shares  of  Common  Stock
originally issued in the June Private Placement. The net proceeds to the Company
from  the  remaining   380  shares  of  Series  A  Preferred   Stock  sold  were
approximately  $7,662,  net of cash  issuance  costs of $1,100 and $733 of value
ascribed to 338 warrants to purchase Common Stock issued to the placement agent.
The  warrants  expire five years from the date of issuance  and have an exercise
price of $2.50 per share,  subject to  adjustment  for  anti-dilution.  The fair
value  ascribed to the warrants was estimated on the date of issuance  using the
Black-Scholes pricing model with the following  assumptions:  risk-free interest
rate of  6.07%;  expected  life of 5 years;  expected  volatility  of 104%;  and
expected dividend yield of 0%.

     On  March  28,  1997,  and  effective  as of  December  31,  1996,  holders
constituting  100% of the  issued  and  outstanding  Series  A  Preferred  Stock
executed a waiver to certain  provisions of the  Registration  Rights  Agreement
(the  "Agreement")   entered  into  in  connection  with  the  December  Private
Placement.  Under the waiver,  these holders  irrevocably  waived any redemption
obligations  of the  Company  with  respect to the Series A  Preferred  Stock in
exchange  for the issuance to such holders of warrants to purchase 300 shares of
the Company's Common Stock,  allocated  amongst the holders on a pro-rata basis.
The  warrants  expire five years from the date of issuance  and have an exercise
price of $2.00 per share,  subject to adjustment for anti-dilution.  The Company
has ascribed a value of $484 to these warrants, which was recorded as an expense
in the Company's  statement of operations  during the first quarter of 1997. The
fair value  ascribed to the warrants was estimated on the date of issuance using
the  Black-Scholes  pricing  model  with the  following  assumptions:  risk-free
interest rate of 6.60%;  expected life of 5 years;  expected volatility of 104%;
and expected dividend yield of 0%. As a result of the aforementioned waiver, the
shares  of  Series  A  Preferred  Stock  which  were  classified  as  redeemable
securities at December 31, 1996 were reclassified as convertible preferred stock
at March  31,  1997 and,  as such,  were  included  in  stockholders'  equity at
December 31, 1997.

     On November  26,  1997,  the Company  completed a private  placement of 240
shares of Series B Preferred Stock (the "November Private  Placement") at $25.00
per share to certain investors. The net proceeds to the Company from the sale of
the 240 shares of Series B Preferred Stock was approximately $5,859, net of cash
issuance costs of $141.

     Optional and Automatic  Conversion.  All shares of Series A Preferred Stock
and Series B Preferred  Stock were  Converted  in November  1998.  Each share of
Series A Preferred  Stock and Series B Preferred  Stock was  convertible  by the
holder into shares of the Company's  Common Stock at any time. In addition,  all
outstanding Series A Preferred

                                      F-12
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Stockholders' Equity (continued)

Stock would have been  automatically  converted  into shares of Common  Stock on
December 31, 1999,  subject to the satisfaction of certain conditions and events
by the Company, or later under certain circumstances.  All outstanding shares of
Series B Preferred Stock would have been automatically  converted into shares of
Common Stock on November 25, 2000,  or at the Company's  option,  up to one year
later.

     The number of shares of Common  Stock to be issued upon  conversion  of the
Series A  Preferred  Stock  was  determined  by  dividing  (i) the sum of $25.00
multiplied  by the number of shares  being  converted,  plus  accrued and unpaid
dividends and any unpaid default  payments  thereon,  by (ii) a conversion price
which was approximately 72% of the then applicable market price of the Company's
Common Stock (the  "Conversion  Price").  As a  consequence,  the effect of this
beneficial  conversion  rate,  determined  as being the  difference  between the
lowest  possible  conversion rate at December 31, 1996 and the fair value of the
Common  Stock at that date,  was  deemed to be a benefit  to the  holders of the
Series A Preferred  Stock earned over the period from  issuance  through July 1,
1997, the date on which the Series A Preferred  Stock first became  convertible.
This deemed benefit was recorded as "embedded  yield on preferred  stock" in the
1997 statement of operations.

     The number of shares of Common  Stock to be issued upon  conversion  of the
Series B  Preferred  Stock  was  determined  by  dividing  (i) the sum of $25.00
multiplied  by the number of shares  being  converted,  plus  accrued and unpaid
dividends and any unpaid default  payments  thereon,  by (ii) a conversion price
equal to the lower of (a) the average  market price of the Common Stock,  or (b)
$1.59 per share.  The average  market price was the average of the daily closing
prices of the Common Stock for the three  consecutive  trading days prior to the
conversion date.

     Dividends. Each holder of the shares of Series A Preferred Stock and Series
B  Preferred  Stock was  entitled  to receive,  out of funds  legally  available
therefor,  cumulative dividends on each share at the rate of $1.25 per share per
annum,  compounded  semi-annually  and  quarterly,  respectively,  when  payable
(whether or not  declared).  The  dividends  were payable in cash or  additional
shares of  preferred  stock  (with each  additional  share  valued at $25.00 per
share) at the Company's  option.  Dividends would have been paid on the Series A
Preferred  Stock and Series B Preferred  Stock prior to any dividends being paid
on any other class of stock  ranking  junior  thereto.  If any cash dividend was
declared and paid in cash to the holders of the Series B Preferred  Stock,  then
the  Company  was  obligated  to give  notice  to the  holders  of the  Series A
Preferred  Stock of such fact,  and the holders of the Series A Preferred  Stock
had the right to elect to  receive  their  next  dividend  payment  in cash.  No
dividends on Common Stock were  declared or paid by the Board  through  December
31, 1998.

Common Stock Options

     The Company  adopted two stock  option plans in 1991 (the 1991 Stock Option
Plan and the 1991  Non-discretionary  Plan,  collectively,  the  "1991  Plans").
Incentive  and  non-qualified  options  under the 1991  Plans may be  granted to
employees, officers, and consultants of the Company. As amended, there are 2,050
shares of Common Stock authorized for issuance under the 1991 Plans.

     In conjunction  with the approval of the Company's plan of  reorganization,
the Company adopted the 1994 Stock Option Plan (the "1994 Plan").  The 1994 Plan
allows directors,  officers and employees to be eligible for grants of incentive
and  non-qualified  stock  options.  In May 1997, the  stockholders  approved an
increase of 1,000 shares to the number of shares  authorized  for issuance under
the 1994  Plan.  Accordingly,  a total of  6,000  shares  of  Common  Stock  are
authorized  for issuance  under the 1994 Plan.  The  exercise  prices of options
under the 1994 Plan are  determined  by a committee  of the Board of  Directors,
but, in the case of an incentive  stock  option,  the exercise  price may not be
less than 100% of the fair market  value of the  underlying  Common Stock on the
date of grant. Non-qualified options may not have an exercise price of less than
85% of the fair  market  value  of the  underlying  Common  Stock on the date of
grant. Options generally vest over four years. For those options which vest over
four years, 20% of the total options

                                      F-13
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Stockholders' Equity (continued)

granted vest on the first  anniversary  of the date of grant,  and an additional
20%, 20%, and 40% of the total options  granted vest on the second,  third,  and
fourth anniversaries of the date of grant,  respectively.  Options are generally
exercisable over a period not to exceed seven years.

     In December 1994,  for services  rendered prior to and during the Company's
Chapter 11 proceedings,  options to purchase 180 shares of Common Stock at $0.50
per share were granted to three  directors of the Company under non-plan  option
agreements.  In  addition,  a non-plan  option to purchase  100 shares of Common
Stock at $0.50 per share was  granted on December  28,  1994 to a newly  elected
director and Chairman of the Finance Committee.  The newly elected director also
received an option,  vesting one year from date of grant,  to purchase 50 shares
of  Common  Stock at an  exercise  price  of $0.50  per  share  pursuant  to the
Company's 1991 Non-discretionary  Plan. The non-plan options generally vest over
four years.  For those non-plan  options which vest over four years,  20% of the
total  non-plan  options  granted vest on the first  anniversary  of the date of
grant and an additional 20%, 20%, and 40% of the total non-plan  options granted
vest on the  second,  third,  and  fourth  anniversaries  of the date of  grant,
respectively.  Non-plan  options are generally  exercisable over a period not to
exceed  seven  years.  As of  December  31,  1998,  370  non-plan  options  were
outstanding  with a weighted  average exercise price of $0.50 per share. Of such
non-plan  options,  370 were  exercisable  at December  31, 1998 with a weighted
average exercise price of $0.50 per share.

     On June 1, 1994,  the Company  negotiated  with  employees  to reduce their
salaries  through August 31, 1994.  Those employees who agreed to continue their
employment  at the reduced wage were granted  certain  option rights to purchase
Common Stock (the  "Options").  Options to purchase 2,210 shares of Common Stock
were  granted  at an  average  exercise  price of $0.57  per  share  under  this
arrangement, of which 377 Options were granted to officers under the 1991 Plans,
with the  remaining  Options  granted  outside of the plans.  The  Options  were
immediately  exercisable  and have a term of seven years from the date of grant.
As of December 31, 1998,  914 Options had been  exercised at a weighted  average
exercise  price of $0.48 per  share  and 552  Options  with a  weighted  average
exercise  price of $0.80 per  share  had been  forfeited.  The  following  table
summarizes information about the Options outstanding and exercisable at December
31, 1998 which were granted outside of the plans:
<TABLE>

                                                        Weighted Average
Range of Exercise Prices     Options             Remaining
                         Outstanding and        Contractual
                           Exercisable         Life (Years)       Exercise Price
<CAPTION>
<S>                         <C>                  <C>                <C>    

$0.30 - $0.45...........       170                  2.6                $0.34
$0.70 - $1.05...........       197                  2.6                $0.75
                           ---------
                               367
                           =========

</TABLE>



                                      F-14
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Stockholders' Equity (continued)

     Information  with respect to the Company's  1991 Plans and the 1994 Plan is
summarized below:
<TABLE>

                                                 Year Ended December 31,
                                   ---------------------------------------------
                                        1998                               1997
                                   ---------------------- ----------------------
                                              Weighted               Weighted
                                               Average               Average
                                   Shares  Exercise Price Shares  Exercise Price
                                   ---------------------------------------------
<CAPTION>
<S>                               <C>       <C>        <C>         <C>    
Outstanding at beginning of period..6,016      $1.15      5,022       $0.98
Granted.............................1,021      $1.03      1,540       $1.66
Exercised........................... (804)     $0.50       (295)      $0.51
Forfeited...........................1,693)     $1.62       (251)      $1.63

                                    ======               =======
Outstanding at period end.......... 4,540      $1.06      6,016       $1.15
                                    ======               =======

Options exercisable at period end..  3,243     $0.82      2,666       $0.79
                                    =======              =======

Weighted average grant-date
fair value of options granted
during the period.....               $0.73                $1.29
                                    =======              =======
</TABLE>

     The following table summarizes  information about stock options outstanding
under the 1991 Plans and the 1994 Plan at December 31, 1998:
<TABLE>

                                                       Weighted Average
                                         ---------------------------------------
                                                Remaining
                               Options       Contractual Life 
Range of Exercise Prices     Outstanding         (Years)          Exercise Price
--------------------------------------------------------------------------------
<CAPTION>
<S>                           <C>               <C>                <C>    
$0.50.......................     2,487             2.8                $0.50
$0.51 - $2.00...............     1,399             6.0                $1.25
$2.01 - $2.99...............       256             4.9                $2.48
$3.00.......................       398             4.6                $3.00
                            ------------
                                 4,540
                            ============
</TABLE>


     The following table summarizes  information about stock options exercisable
under the 1991 Plans and the 1994 Plan at December 31, 1998:
<TABLE>

                                                                  Weighted
                                               Options             Average
 Range of Exercise Prices                    Exercisable        Exercise Price
                                          ----------------    ------------------
<CAPTION>
<S>                                         <C>                   <C>   
       $0.50.......................            2,456                 $0.50
       $0.51 - $2.00...............              522                 $1.29
       $2.01 - $2.99...............               80                 $2.51
       $3.00.......................              185                 $3.00
                                          ----------------
                                               3,243
                                          ================
</TABLE>


                                      F-15
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Stockholders' Equity (continued)

Fair Value Disclosures

     Had compensation  cost for the Company's option plans been determined based
on the fair value of the  options at the date of grant,  as  prescribed  by SFAS
123,  the  Company's  net loss  available to common  stockholders  and basic and
diluted net loss per share available to common  stockholders  for the year ended
December 31, would have been as follows:
<TABLE>

                                               1998        1997         1996
                                           ------------ ---------- -------------
<CAPTION>
                                                                   
<S>                                        <C>         <C>          <C>    

 Net loss available to common stockholders:
   As reported.............................  $ (3,157)   $(16,940)    $  (6,356)
   Pro forma...............................  $ (4,863)   $(18,024)    $  (6,840)
 Basic and diluted net loss per share 
 available to common stockholders:
   As reported.............................  $  (0.06)   $  (0.37)    $   (0.15)
   Pro forma...............................  $  (0.09)   $  (0.40)    $   (0.17)
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the following  weighted  average
assumptions used for grants during the applicable  periods:  risk-free  interest
rate of 4.5% for 1998,  6.2% for 1997 and 6.6 % for 1996;  an expected life of 4
years,  5 years  and 4 years for 1998,  1997 and  1996,  respectively;  expected
volatility of 100% for all periods and dividend yield of 0% for all periods.

     Because  options  generally vest over four years and the Company expects to
make  additional  option  grants each year,  the Company  believes the above pro
forma  disclosures are not  representative  of the pro forma effects on reported
results of operations to be expected in future periods.

Warrants

     In September  1994, in connection with a $1,000 bridge loan provided to the
Company by an investor  (who  became a  director),  the  Company  granted to the
investor  warrants to purchase 2,000 shares of Common Stock at an exercise price
of $0.50 per share.  In January 1997,  the Company  issued  approximately  1,686
shares of Common  Stock in  connection  with the net exercise of the warrants by
the  investor's  assignee.  In June 1995,  the Company  entered into a financing
agreement with the investor  providing for loans to the Company of up to $2,500.
Upon signing the  agreement,  the Company issued to the investor 625 warrants to
purchase Common Stock,  and, in each month in which the loan was available,  the
Company was  obligated to issue to the investor 156 warrants to purchase  shares
of Common Stock.  Under the financing  agreement,  a total of 1,563  warrants to
purchase  Common Stock were issued to the investor at an exercise price of $1.00
per share.  In January 1997,  the Company issued  approximately  1,073 shares of
Common  Stock  in   connection   with  the   investor's   net  exercise  of  the
aforementioned warrants.

     On  March  28,  1997,  and  effective  as of  December  31,  1996,  holders
constituting  100% of the  then  issued  and  outstanding  shares  of  Series  A
Preferred  Stock  executed a waiver to certain  provisions  of the  registration
rights agreement (the "Agreement")  entered into in connection with the December
Private  Placement.  Under the  waiver,  these  holders  irrevocably  waived any
redemption  obligation  of the  Company  with  respect to its Series A Preferred
Stock in exchange  for the  issuance to the holders of warrants to purchase  the
300 shares of the  Company's  Common Stock,  allocated  amongst the holders on a
pro-rata  basis.  The  warrants  expire five years from the date of issuance and
have  an  exercise  price  of  $2.00  per  share,   subject  to  adjustment  for
anti-dilution. The Company has ascribed a value of $484 to these warrants, which
was recorded as an expense in the Company's  statement of operations  during the
first quarter of 1997.  The fair value ascribed to the warrants was estimated on
the date of issuance  using the  Black-Scholes  pricing model with the following
assumptions:  risk-free  interest  rate of  6.60%;  expected  life  of 5  years;
expected  volatility of 104%; and expected  dividend yield of 0%. As a result of
the aforementioned waiver, the shares of Series A Preferred

                                      F-16
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Stockholders' Equity (continued)

Stock, which were classified as redeemable securities at December 31, 1996, were
reclassified as convertible  preferred stock at March 31, 1997 and, as such, are
included in stockholders' equity at December 31, 1997.

     Warrants to purchase a total of 905 shares of Common Stock were outstanding
as of December 31, 1998, and have a weighted average remaining  contractual life
of 2.8 years and a weighted average exercise price of $2.27 per share.

     As of December  31, 1998,  6,182  shares of Common Stock were  reserved for
issuance upon exercise of outstanding options and warrants.

6. Related Party Transactions

     In  April  1994,  the  Company  loaned  $210 to the  Company's  then  Chief
Executive  Officer in exchange  for a note,  secured by shares of the  Company's
Common Stock,  bearing  interest at the lesser of the highest  marginal rate per
annum  applicable to the Company's  borrowings or the highest rate  allowable by
law (10% per annum at December 31, 1997).

     On August 14, 1998, the Company  entered into an employment  agreement (the
"Employment  Agreement")  with the  aforementioned  former  officer.  Under  the
Employment  Agreement the former officer will provide consulting services to the
Company through  December 15, 2001. In exchange for these services,  $110,000 of
the note  receivable  from the officer shall be forgiven on a monthly basis over
the  period  commencing  August 15,  1998 and  ending  December  15,  2001.  The
remaining,  $100,000 of the note receivable from the officer will be forgiven on
December 15, 2001 if the officer has performed all the required  services  under
the Agreement. The Agreement will terminate on December 15, 2001.

     A director  of the  Company  received  consulting  fees of $150 in 1998 and
1997,  including  fees for office  expenses.  The Company paid the same director
$100 in consulting fees in 1996.

7. Commitments

Operating Lease Commitments

     The Company  currently  leases its  principal  facilities  (the  "Principal
Offices) in Redwood Shores,  California,  pursuant to a sublease that expires in
2001. In addition, the Company subleases to third parties certain space near the
Principal  Offices under subleases that expire in 1999. The Joint Venture leases
approximately 1,000 square feet in Nanjing,  China. In addition to monthly rent,
the U.S.  facilities are subject to additional rental payments for utilities and
other costs above the base amount.  Facilities  rent  expense was  approximately
$420, $892, and $346 in 1998, 1997, and 1996, respectively.  Sublease income was
approximately  $128 and $188 for the years ended  December  31,  1998 and  1997,
respectively.

     Future  minimum lease  payments under  noncancelable  operating  leases are
approximately $603, $620, and $558 for the years ending December 31, 1999, 2000,
and 2001, respectively.  The Company's rent expense is expected to be reduced by
approximately  $129 in 1999 in connection  with the subleases  described  above.
Future minimum payments required under capital leases, which expire in 1999, are
insignificant at December 31, 1998.

                                      F-17
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

8. Income Taxes

     As of December  31,  1998,  the Company  had  federal  net  operating  loss
carryforwards  available to reduce taxable income through 2012 of  approximately
$47,700.  The  Company  also had  federal  research  and  investment  tax credit
carryforwards of approximately $430 which expire at various dates through 2010.

        Deferred  tax assets and  liabilities  at  December  31,  consist of the
following:
<TABLE>

                                                       1998           1997
                                                   -------------- -------------
<CAPTION>

<S>                                                <C>           <C>    
 Deferred tax assets:
       Net operating loss carryforwards.........     $ 16,210      $ 15,459
       Credit carryforwards.....................          430           323
       Deferred income..........................          221           149
       Other, net...............................          877         1,142
                                                   -------------- -------------
 Total deferred tax assets......................       17,740        17,073
                                                   -------------- -------------
                                                       17,740        17,073
 Valuation allowance............................      (17,740)      (17,073)
                                                   -------------- -------------
 Net deferred tax assets........................     $      -      $      -
                                                   ============== =============
</TABLE>




     A full  valuation  allowance  has been  established  for the  Company's net
deferred tax assets since the  realization of such assets through the generation
of future taxable income is uncertain.

     Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating  losses and tax credit  carryforwards  may be  impaired  or limited in
certain  circumstances.  These circumstances  include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined,  over a three
year period.  During 1997, the Company experienced stock ownership changes which
could  limit  the  utilization  of its  net  operating  loss  and  research  and
investment tax credit carryforwards in future periods.

9. Segment Information

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of An
Enterprise and Related  Information"  ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating  segments and was required to be adopted in
periods  beginning  after December 15, 1997. It also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major
customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and
the Company's  information  has been broken down into two segments - Handwriting
Recognition and Systems integration.

     The  accounting  policies  followed by the  segments  are the same as those
described  in the "Summary of  Significant  Accounting  Policies."  Segment data
includes revenues, as well as allocated  corporate-headquarters costs charged to
each of the operating segments.

     The Company identifies reportable segments by classifying revenues into two
categories   Handwriting   Recognition  and  Systems   Integration   Handwriting
Recognition  represents  the sale of hardware  and  software  incorporating  the
Company's technology.  Systems Integration  represents the sale and installation
of third party  computer  equipment  and  systems  that  utilize  the  Company's
products. All sales above represent sales to external customers.

                                      F-18
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

9. Segment Information (continued)

The table below  presents  information  about  reporting  segments for the years
ended December 31,:
<TABLE>

                               Handwriting         Systems
                               Recognition       Integration         Total
                             ---------------- ---------------- -----------------
<CAPTION>

<S>                           <C>              <C>             <C>    <C>   
  1998
      Revenues                  $      2,702      $      1,879    $       4,581
      Loss from operations      $     (2,561)     $       (684)   $      (3,285)
      Total assets              $      2,160      $      1,194    $       3,354
      Depreciation and
      amortization              $        283      $         44    $         327
  1997
      Revenues                  $      4,040      $      1,476    $       5,516
      Loss from operations      $    (11,609)     $        (18)   $     (11,627)
      Total assets              $      6,192      $      1,299    $       7,491
      Depreciation and
      amortization              $        314      $         33    $         347
  1996
      Revenues                  $      1,548      $      1,339    $       2,887
      Loss from operations      $     (6,379)     $       (156)   $      (6,535)
      Total assets              $     12,052      $      1,451    $      13,503
      Depreciation and
      amortization              $        331      $         22    $         353
</TABLE>

The following  table  represents  revenues and long-lived  asset  information by
geographic location for the period ended December 31,:
<TABLE>

                      Revenues                         Long Lived Assets
             -------------------------------- ----------------------------------
                   1998       1997      1996       1998      1997        1996
<CAPTION>
             ------------ ----------- -------  ---------  ----------  ---------

<S>             <C>        <C>       <C>       <C>       <C>        <C>    
  U.S.           $ 2,702    $ 4,039    $ 1,537   $   416   $  655     $   367

  China            1,879      1,476      1,339       123      143         148

  Other                -          1         11         -        -          22
                ========= ========= ==========  ========= ======== ===========
                 $ 4,581   $  5,516    $ 2,887   $   539   $  798     $   537
                ========= ========= ==========  ========= ======== ===========
</TABLE>


     The Company's  export sales from U.S.  operations  were 16%, 40%, and 7% of
total revenues in 1998, 1997, and 1996, respectively.


                                      F-19
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

10. Statement of Cash Flows Data
<TABLE>

                                                     December 31,
                                          ------------------------------------
                                             1998        1997         1996
<CAPTION>
                                          ----------- ------------ -----------
<S>                                     <C>          <C>          <C>    

 Schedule of non-cash transactions:
   Conversion of redeemable convertible
   preferred stock into Series A
   Preferred Stock........................ $      -    $  9,417     $      -




   Issuance of warrants to purchase 
   Common Stock in connection with the
   June and December Private Placements... $      -    $      -     $    844




   Common Stock exchanged for redeemable
   convertible preferred stock in
   the December Private Placement......... $      -    $      -     $  1,755
</TABLE>




Supplemental disclosure of cash flow information:

     Interest paid in 1998, 1997 and 1996 was $19, $106 and $215, respectively.

11. Employee Benefit Plans

     The  Company  sponsors a 401(k)  defined  contribution  plan  covering  all
employees meeting certain  eligibility  requirements.  Contributions made by the
Company are determined annually by the Board of Directors.  To date, the Company
has made no contributions to this plan.

                                      F-20
<PAGE>
                                                             
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Redwood
Shores, State of California, on March 30, 1999.


                               COMMUNICATION INTELLIGENCE CORP.

                                             /S/ Guido DiGregorio
                                            --------------------------
                                By:              Guido DiGregorio
                                       President and Chief Operating Officer

        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this  report  has been  signed  below by the  following  persons  on  behalf  of
Registrant and in the capacities indicated on March 30, 1999.

  Signature                                  Title

  /s/ Guido DiGregorio       Director, President
-----------------------     (Principal Executive Officer)
      Guido DiGregorio                                   
                    
  /s/ Craig M.Hutchison      Treasurer and Controller
------------------------     (Acting Principal Financial and Accounting Officer)
      Craig M.Hutchison                       
   

  /s/ Jess M.Ravich           Director
------------------------  
      Jess M.Ravich                       

  /s/ Philip S. Sassower      Director, Chairman of the Board , and Secretary
------------------------  
      Philip S. Sassower                       
   
  /s/ Jeffrey Steiner         Director
------------------------  
      Jeffrey  Steiner                       

  /s/ Chien Bor Sung          Director
------------------------  
      Chien Bor Sung


                                       1
<PAGE>
                                   
                                   SCHEDULE II

                     Communication Intelligence Corporation
                 Valuation and Qualifying Accounts and Reserves
                                 (In thousands)

Years Ended December 31, 1996, 1997, 1998
                                Balance     Charged to
                             At Beginning   Costs and                  Balance
                              Of Period      Expense                    At End
                                                         Deductions   Of Period

Year ended December 31, 1996:
Accounts receivable allowances..  $76           $74        $(65)          $85




Year ended December 31, 1997:
Accounts receivable allowances..  $85          $195       $(243)          $46




Year ended December 31, 1998:
Accounts receivable allowances..  $46          $236       $(108)         $174






                                      S-1

<PAGE>                        
 
                                                                   Exhibit 10.23

                  AMENDMENT TO THE CERTIFICATE OF DESIGNATIONS

                                       OF

                    5% CUMULATIVE CONVERTIBLE PREFERRED STOCK

                                       OF

                     COMMUNICATION INTELLIGENCE CORPORATION


It is hereby certified that:

               1.  The name of the  corporation  is  Communication  Intelligence
Corporation (the "Corporation").

               2.   The original  Certificate of  Designations  of 5% Cumulative
                    Convertible   Preferred  Stock  of  the   Corporation   (the
                    "Certificate of Designations")  was filed with the Secretary
                    of State of the State of Delaware on December 27, 1996.

               3. The Certificate of Designations is hereby amended as follows:

                    The first  sentence of Section  1(a) of the  Certificate  of
                    Designations  shall be amended and  restated in its entirety
                    as follows:

                           "(a) Cumulative.  The holders of the Preferred Shares
                  shall  be  entitled  to  receive  out  of any  assets  legally
                  available therefor  cumulative  dividends at the rate of $1.25
                  per share  per annum  compounded  semi-annually  when  payable
                  (whether  or  not   declared),   payable  on  the   Conversion
                  Commencement Date (as defined below) and  semi-annually  every
                  six (6) months  thereafter  (each a "Dividend  Payment Date"),
                  when and as declared by the Board of Directors,  in preference
                  and  priority  to any  payment of any  dividend  on the Common
                  Stock (as defined below) or any other class or series of stock
                  of the  Corporation  other  than  shares of the  Corporation's
                  Series B Cumulative  Convertible Preferred Stock designated by
                  that  certain  Certificate  of  Designations  filed  with  the
                  Secretary  of State of the State of Delaware  on November  25,
                  1997 ("Series B Preferred")."

                  Section 1(b) of the  Certificate  of  Designations  shall be
                  amended and restated in its entirety as follows:

                           "(b)  Cash  or  PIK.  Any  dividend  payable  on  the
                  outstanding Preferred Shares may be paid, at the option of the
                  Corporation,   either  (i)  in  cash  or  (ii)  in  additional
                  Preferred  Shares (with each new Preferred Share valued at $25
                  per share);  provided,  however, that if the Corporation shall
                  fail to pay any  dividend  on a  Dividend  Payment  Date,  the
                  amount  of such  dividend  shall be  added to the  Liquidation
                  Preference (as defined below) for such Preferred  Shares,  and
                  further  provided  that  if  any  dividend  on  the  Series  B
                  Preferred  shall be declared to be paid in cash,  then (i) the
                  Corporation  shall give the  holders of the  Preferred  Shares
                  notice of such cash  dividend  payment  not later  than 5 days
                  prior to the date  such  dividend  is to be paid and (ii) each
                  holder of Preferred  Shares shall have the option of receiving
                  the next dividend  payment payable on the Preferred  Shares in
                  cash."

                  Section 2 of the Certificate of Designations  shall be amended
                  and restated in its entirety as follows:

               3. Liquidation  Preference.  In the  event of any  liquidation,
                  dissolution  or  winding  up  of  the  Corporation,   either
                  voluntary  or  involuntary,  the  holders  of the  Preferred
                  Shares shall be

                                       1
<PAGE>
                                                       Exhibit 10.23 (continued)

                  entitled  to  receive,   prior  and  in  preference  to  any
                  distribution of any assets of the Corporation to the holders
                  of any  other  class or  series of  shares,  other  than the
                  Series B  Preferred  (which  shall be on a pari passu  basis
                  with the Preferred Shares), the amount of $25 per share plus
                  any  accrued but unpaid  dividends  (with  dividends  deemed
                  accrued on a per diem basis  through  the date of such event
                  and thereafter even if such event or any distribution is not
                  on a Dividend Payment Date) (the "Liquidation Preference")."

               4. The foregoing  amendments to the Certificate of Designations
                  herein  certified have been duly adopted in accordance  with
                  the provisions of Section 151(g), 228 and 242 of the General
                  Corporation Law of the State of Delaware.


Dated as of June 12, 1998


                                             /s/ Philip S. Sassower
                                     Philip S. Sassower, Chairman of the Board
                                                  and Secretary




                                       2
<PAGE>                                                                   
                                                                   Exhibit 10.24

                            CERTIFICATE OF AMENDMENT
                                       OF
              THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                     COMMUNICATION INTELLIGENCE CORPORATION


        It is hereby certified that:

        1. The name of the corporation is Communication Intelligence Corporation
(hereinafter called the "Corporation").

        2.  The  amended  and  restated  certificate  of  incorporation  of  the
Corporation  is hereby  amended by striking out paragraph (a) of Article  Fourth
thereof  and by  substituting  in lieu  of  said  paragraph  the  following  new
paragraph:

     "FOURTH:  The total  number of shares  which  the  Corporation  shall  have
     authority  to issue is  110,000,000  of which  100,000,000  shall be Common
     Stock, par value $0.01 per share, and 10,000,000  shares shall be Preferred
     Stock, par value $0.01 per share."

The balance of Article Fourth shall remain unchanged.

        3. This amendment of the Corporation's  certificate of incorporation has
been duly  adopted in  accordance  with the  provisions  of  Section  242 of the
General Corporation Law of the State of Delaware.

Dated as of June 12, 1998.

                                              /s/ Philip S. Sassower          
                                           Philip S. Sassower, Chairman of the
                                           Board and Secretary

                                       1
<PAGE>
                                                     
                                                                   Exhibit 10.25

         SETTLEMENT, GENERAL RELEASE AND PART TIME EMPLOYMENT AGREEMENT

        This  Settlement,  General  Release and Part Time  Employment  Agreement
("Agreement") is made by and between Communication Intelligence Corporation, its
subsidiaries and affiliates (the "Company"), and James Dao ("Employee").

        WHEREAS, Employee has been employed by the Company on a full time basis;

        WHEREAS,  the  Company  and  Employee  desire to convert  such full time
employment to part time employment;

        NOW THEREFORE,  in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as "the Parties") hereby agree as
follows:

A.  Effective  August 14, 1998  Employee will resign his position as a full time
    employee.

     1.       Employee  will be paid his full time  compensation  up to and 
              including that date.
 
     2.       Benefits,  except for stock options that are discussed below, will
              be treated in the standard  manner as for other  employees  
              separating from fulltime service.

B.  Effective August 14, 1998 Employee shall become a part time employee of 
    the Company.

         1.    As a part time  employee,  Employee  shall  report  to the  
               Company'sPresident.

         2.    Employee will resign his part time employment with the Company
               on  December  15,  2001,  unless the  Company  terminates  the
               Agreement sooner for cause.

         3.    The following shall constitute cause:

              a.      Employee is convicted of a felony
              b.      Employee engages in illegal conduct against or on behalf 
                      of the Company
              c.      Employee intentionally and knowingly acts contrary to the 
                      substantial interest of the Company
              d.      Continuous and substantial failure, following written
                      notice of such failure,  by Employee,  to perform the
                      duties  and  responsibilities  accepted  by  Employee
                      pursuant to this Agreement or  subsequently  accepted
                      by Employee
              e.      Substantial failure on the part of Employee to comply
                      with the Company's  published  ethical standards (see
                      attachment Corporate Policy A-001-1).
C.      Duties

         1.       From the  effective  date  hereof  through  November  14, 1998
                  Employee will attempt to consummate the  transaction  with IBM
                  that he is  currently,  or recently has been,  pursuing.  Such
                  time period may be extended by mutual agreement.

             a.   At  Employee's  requests  and at the  Company's  sole
                  discretion,  the Company  may assist  Employee in his
                  efforts to consummate such transaction.

             b.   When Employee has an agreed upon term sheet or memorandum of 
                  intent from IBM, he shall  present such to Company.
    
                i.  Company  shall have fifteen (15) days to accept or reject 
                    the transaction  as described in such term sheet or 
                    memorandum of intent.                
               
                  
               ii.  As part of the  evaluation  process,  Company  and  Employee
                    shall mutually agree upon what obligations the Company would
                    be willing to assume if it accepts the transaction.

                                       1
<PAGE>

                                                       Exhibit 10.25 (continued)

              iii.  Failure  on  the  part  of   Employee  to  present  a
                    transaction to Company or to successfully  consummate
                    a transaction, as contemplated by this Section, shall
                    not  constitute  cause for the purpose of terminating
                    of this Agreement.

         2.       From the  effective  date hereof  through  December  15, 2001,
                  Employee  shall be  available  to consult  with the  Company's
                  President or his designee regarding  knowledge and information
                  he may  have  acquired  about  CIC  China,  including  but not
                  limited to its customers,  competitors,  employees, technology
                  and  the  industry  or  industries  in  general  in  which  it
                  operates.  Company will not make  unreasonable  requests  upon
                  Employee's time and will allow Employee a reasonable amount of
                  time to respond to its requests.

D.      Compensation

         1.       After  August 14, 1998  Employee  shall not be entitled to any
                  compensation except as specifically provide for in Subsections
                  D2, D3 and D4 below.

         2.       Employee shall receive a 1% fee of any debt financing and a 5%
                  fee of any equity  financing or product or market  development
                  funding  resulting from the consummation of a transaction with
                  IBM as referred to above.  The base to which such  percentages
                  shall  be  applied  for  purposes  of  calculating  Employee's
                  compensation  under this subsection shall be the nonrefundable
                  cash  consideration  actually  received  by Company  from such
                  transaction.  Company  shall pay such fee within  thirty  (30)
                  days of receipt of such cash.

                  a.       Employee shall be  responsible  for his own costs and
                           expenses   associated   with  his   pursuit   of  the
                           transaction  contemplated  by this Section  including
                           but  not  limited  to the  cost  of  consultants  and
                           employees,   such  as  Bill   Gould,   administrative
                           assistance, travel and entertainment. Notwithstanding
                           the above,  Company may  reimburse  Employee for such
                           expenses  if  approved  in writing  by the  Company's
                           President prior to being incurred.

         3.       Net  debt of  $296,165  comprised  of a  $210,000  debt to the
                  Company, $168,693 of interest and $50,829 in other debt to the
                  Company, less $100,000 of such debt to be forgiven pursuant to
                  Subsection (a) hereof, and net of $33,357 of accrued vacation,
                  and net of approved expense reimbursement  requests related to
                  expenses incurred in pursuit of the Company's business,  to be
                  determined  pursuant  to  Subsection  (c)  hereof,   shall  be
                  forgiven. Such net outstanding debt shall be forgiven pro-rata
                  on a monthly basis over the period  commencing August 15, 1998
                  and ending December 15, 2001.

                  a.       The  $100,000  excluded  from  the  debt  forgiveness
                           pursuant  to  the  immediately  preceding  paragraph,
                           shall  continue  to be due and  payable  in full upon
                           termination of Employee's  part time  employment with
                           the Company unless, at that time, Employee executes a
                           general   release   consistent   with  the   releases
                           contained in this Agreement.

                  b.       To  the  extent  that  the  Company  is  required  to
                           withhold  taxes on such  debt  forgiveness,  Employee
                           will remit to the Company  such amounts as may be due
                           as  withholding  within  ten  days of  receipt  of an
                           invoice from the Company pertaining thereto.  Receipt
                           shall be deemed to have occurred three days after the
                           postmarked  dates of any such invoices.  Company will
                           invoice Employee on a monthly basis.

                  c.       Expense  reports for all  amounts for which  Employee
                           seeks  or  intends  to seek  reimbursement  shall  be
                           submitted  to the Company  within  sixty (60) days of
                           the effective  date hereof.  Subsequent to such time,
                           Employee  shall  submit no  further  expense  reports
                           except  for  expenses  incurred   subsequent  to  the
                           effective  date of this  Agreement  and  approved  in
                           writing  by the  Company's  President  prior to being
                           incurred.

                                       2
<PAGE>
                                                       Exhibit 10.25 (continued)

                   d.      i.       The $296,165 net debt referred to above will
                                    be  adjusted   for  any   approved   expense
                                    reimbursement  requests  made  by  Employee,
                                    pursuant to this  Subsection,  for  expenses
                                    incurred prior to June 1, 1998.

                           ii.      For approved expense reimbursement  requests
                                    made   by   Employee,   pursuant   to   this
                                    Subsection,  for  expenses  incurred  on  or
                                    after June 1, 1998 and through the effective
                                    date  hereof,  Employee  may at  his  option
                                    apply  such   amounts  to  the  purchase  of
                                    certain  of the  Company's  tangible  assets
                                    pursuant to Section F2a hereof or to further
                                    reduce the  $296,165  net debt  referred  to
                                    above.

         4.       Stock Options.  As of the effective  date hereof  Employee has
                  vested  options to purchase  660,000  shares of the  Company's
                  common  stock and  options to purchase  660,000  shares of the
                  Company's  common  stock,  which  are  scheduled  to  vest  on
                  December  15, 1998.  Such  options  were issued  pursuant to a
                  stock option agreement between the Company and Employee.  Such
                  agreement  shall  continue  in force until the  expiration  or
                  termination  of this  Agreement,  at which time  Employee will
                  have thirty days in which to exercise his then vested options.

E.       Sale of Company  stock.  Employee  will give Company five business days
         written notice prior to the sales of any of the Company's  stock by him
         or the sale of any of the  Company's  stock by a close family member to
         whom Employee  transferred such stock after July 28, 1998.  During such
         five day  period  Company  may elect to  purchase  such stock or find a
         buyer therefor on the same terms under which the stock is being offered
         to another party or to the public market.

               1.   These  restrictions shall not apply to transfers of stock to
                    family  members  where the market  value of the  transferred
                    stock is such that the transfer may be accomplished  without
                    generating  gift tax  under the gift tax  provisions  of the
                    Internal Revenue Code.

               2.   In no event will  Employee sell stock in volume in excess of
                    the volume limitations specified under Rule 144 of the rules
                    and regulations of the Securities and Exchange Commission.

               3.   Without  obligating  itself to  purchase or to find a buyer,
                    upon Employee's  request,  Company agrees to make reasonable
                    efforts to assist Employee in selling his Company stock.

F.      Confidential Information.

         1.       Employee shall continue to maintain the confidentiality of all
                  confidential  and  proprietary  information of the Company and
                  shall  continue to comply with the terms and conditions of the
                  Proprietary   Information  and  Employee  Invention  Agreement
                  between Employee and the Company.

                  a.       Employee  shall  not  represent  IBM or assist in the
                           consummation of a transaction between IBM and a third
                           party if such actions would  conflict with  Employees
                           obligations   under  this   Agreement   or  with  his
                           obligations  under the  Proprietary  Information  and
                           Employee Invention Agreement referred to above.

                  b.       Employee shall not solicit Company  employees or hire
                           or engage former Company  employees within six months
                           of such former employees' separation from the Company
                           without the written consent of the Company.

         2.       Employee   shall   return  all  the   Company   property   and
                  confidential and proprietary  information in his possession to
                  the Company on the Effective Date of this Agreement or on such
                  other date as may be agreed upon by the Company's President.

                                       3
<PAGE>

                                                       Exhibit 10.25 (continued)

                  a.       Upon mutual agreement  between the Parties,  Employee
                           may purchase  certain  tangible  assets from Company,
                           which are currently in Employee's possession.

G.       Release of Claims.  Employee  agrees that the  foregoing  consideration
         represents  settlement in full of all outstanding  obligations  owed to
         Employee  by the  Company.  Employee  on  behalf  of  himself,  and his
         respective heirs, family members,  executors and assigns,  hereby fully
         and forever  releases Company and its officers,  directors,  employees,
         investors,   shareholders,   administrators,   affiliates,   divisions,
         subsidiaries,  predecessor  and  successor  corporations,  and assigns,
         from, and agrees not to sue concerning,  any claim, duty, obligation or
         cause of action relating to any matters of any kind,  whether presently
         known or unknown, suspected or unsuspected, that he may possess arising
         from any  omissions,  acts or facts  that  have  occurred  up until and
         including  the  Effective  Date of this  Agreement  including,  without
         limitation,

         1.       any and all  claims  relating  to or arising  from  Employee's
                  employment  relationship  with the Company and the termination
                  of his full time  relationship,  including  but not limited to
                  any  claims  Employee  may  assert  under  the  August 1, 1988
                  resolution  of the  Company's  Board of  Directors,  sometimes
                  referred to as the "Golden Parachute";

         2.       any and all claims  relating to, or arising  from,  Employee's
                  right to  purchase,  or actual  purchase of shares of stock of
                  the Company,  including,  without  limitation,  any claims for
                  fraud, misrepresentation,  breach of fiduciary duty, breach of
                  duty under  applicable  state  corporate  law, and  securities
                  fraud under any state or federal law;

         3.       any and all claims for  wrongful  discharge of  employment  or
                  termination of full time employment;  termination of full time
                  employment  in  violation  of public  policy;  discrimination;
                  breach of  contract,  both  express and  implied;  breach of a
                  covenant  of good faith and fair  dealing,  both  express  and
                  implied;   promissory   estoppel;   negligent  or  intentional
                  infliction  of emotional  distress;  negligent or  intentional
                  misrepresentation;  negligent or intentional interference with
                  contract or prospective  economic  advantage;  unfair business
                  practices;  defamation;  libel; slander; negligence;  personal
                  injury;   assault;   battery;   invasion  of  privacy;   false
                  imprisonment; and conversion;

         4.       any and all  claims for  violation  of any  federal,  state or
                  municipal statute, including, but not limited to, Title VII of
                  the Civil  Rights Act of 1964,  the Civil  Rights Act of 1991,
                  the  Age   Discrimination  in  Employment  Act  of  1967,  the
                  Americans  with  Disabilities  Act of  1990,  the  Fair  Labor
                  Standards Act, the Employee  Retirement Income Security Act of
                  1974, The Worker  Adjustment and Retraining  Notification Act,
                  Older Workers  Benefit  Protection  Act; the  California  Fair
                  Employment  and Housing  Act,  and Labor Code  section 201, et
                  seq. and section 970, et seq.;

         5.       any and all  claims for  violation  of the  federal,  or any
                  state, constitution;

         6.       any  and  all  claims  arising  out  of  any  other  laws  and
                  regulations    relating   to    employment    or    employment
                  discrimination; and

         7.       any  and  all  claims  for   accountants,   or  attorneys  or
                  other professional fees and costs.

         The  Company  and  Employee  agree that the  release  set forth in this
         section  shall be and  remain in effect in all  respects  as a complete
         general  release as to the  matters  released.  This  release  does not
         extend to any obligations incurred under this Agreement.

H.     Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that
       he is  waiving  and  releasing  any  rights  he may  have  under  the Age
       Discrimination  in  Employment  Act of 1967 ("ADEA") and that this waiver
       and release is knowing and voluntary.
       Employee and the Company agree that this waiver

                                       4
<PAGE>
                                                       Exhibit 10.25 (continued)

H.     and  release  does not apply to any rights or claims that may arise under
       ADEA after the Effective Date of this  Agreement.  Employee  acknowledges
       that the consideration  given for this waiver and release Agreement is in
       addition  to anything of value to which  Employee  was already  entitled.
       Employee  further  acknowledges  that he has been advised by this writing
       that (a) he should  consult  with an  attorney  prior to  executing  this
       Agreement;  (b) he has at least  twenty-one  (21)  days  within  which to
       consider this Agreement; (c) he has at least seven (7) days following the
       execution of this Agreement by the parties to revoke the  Agreement;  and
       (d) this Agreement shall not be effective until the revocation period has
       expired.

I.     Civil Code Section 1542.  Employee represents that he is not aware of any
       claim other than the claims that are released by this Agreement. Employee
       acknowledges  that  he has  been  advised  by his  legal  counsel  and is
       familiar with the provisions of California Civil Code Section 1542, which
       provides as follows:

                A GENERAL  RELEASE  DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
                DOES NOT KNOW OR  SUSPECT  TO EXIST IN HIS  FAVOR AT THE TIME OF
                EXECUTING  THE  RELEASE,   WHICH  IF  KNOWN  BY  HIM  MUST  HAVE
                MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

       Employee  being aware of said code section,  agrees to expressly  waive
       any rights he may have  thereunder,  as well as under any other statute
       or common law principles of similar effect.

J.     No  Pending  or Future  Lawsuits.  Employee  represents  that he has no
       lawsuits,  claims,  or actions pending in his name, or on behalf of any
       other  person or entity,  against  the  Company or any other  person or
       entity  referred to herein.  Employee also  represents that he does not
       intend to bring any  claims on his own behalf or on behalf of any other
       person or entity  against  the  Company  or any other  person or entity
       referred to herein.

K.     Application for Employment.  Employee understands and agrees that, as a
       condition  of this  Agreement  and  unless  specifically  provided  for
       herein,  he shall not be entitled to any  employment  with the Company,
       its subsidiaries,  or any successor, and he hereby waives any right, or
       alleged right, of employment or re-employment with the Company.

L.     Confidentiality.  The  Parties  hereto  each  agree to use  their  best
       efforts to maintain in confidence the existence of this Agreement,  the
       contents and terms of this Agreement,  and the  consideration  for this
       Agreement   (hereinafter   collectively   referred  to  as  "Settlement
       Information").  Each  Party  hereto  agrees  to take  every  reasonable
       precaution to prevent disclosure of any Settlement Information to third
       parties,  and each agrees that there will be no publicity,  directly or
       indirectly,  concerning any Settlement Information.  The Parties hereto
       agree to take every precaution to disclose Settlement  Information only
       to  those  employees,  officers,  directors,  attorneys,   accountants,
       governmental entities, and family members who have a reasonable need to
       know of such Settlement Information.

M.     No  Cooperation.  Employee  agrees he will not act in any  manner  that
       might damage the business of the Company.  Employee agrees that he will
       not  counsel  or  assist  any   attorneys  or  their   clients  in  the
       presentation or prosecution of any disputes,  differences,  grievances,
       claims,  charges,  or complaints by any third party against the Company
       and/or  any  officer,   director,   employee,  agent,   representative,
       shareholder  or attorney  of the  Company,  unless  under a subpoena or
       other court order to do so. Employee will  immediately  notify Company,
       in writing,  of the  receipt by Employee of any such  subpoena or court
       order.

N.     Non-Disparagement.  Each  party  agrees to refrain  from any  defamation,
       libel  or  slander  of the  other,  or  tortious  interference  with  the
       contracts  and  relationships  of the other.  All  inquiries by potential
       future employers of Employee will be directed to the Company's President.
       Upon inquiry, the Company shall only state the following: Employee's last
       position and dates of employment.

                                       5
<PAGE>


                                                       Exhibit 10.25 (continued)

O.    Costs. The Parties shall each bear their own costs, expert fees, attorneys
      fees and other fees incurred in connection with this Agreement.

P.    Governing Law.  This Agreement shall be governed by the laws of the State 
      of California.

Q.     Authority. The Company represents and warrants that the undersigned has
       the  authority  to act on behalf of the Company and to bind the Company
       and all that may claim  through it to the terms and  conditions of this
       Agreement. Employee represents and warrants that he has the capacity to
       act on his own behalf and on behalf of all whom might claim through him
       to bind them to the terms and conditions of this Agreement.  Each Party
       warrants  and  represents  that there are no liens or claims of lien or
       assignments  in law or equity or  otherwise  of or  against  any of the
       claims or causes of action released herein.

R.     No  Representations.   Each  party  represents  that  it  has  had  the
       opportunity  to consult with an attorney,  and has  carefully  read and
       understands  the scope and effect of the provisions of this  Agreement.
       Neither party has relied upon any  representations  nor statements made
       by the other party hereto which are not  specifically set forth in this
       Agreement.

S.     Severability.  In the event  that any  provision  hereof  becomes or is
       declared  by  a  court  of  competent   jurisdiction   to  be  illegal,
       unenforceable  or void, this Agreement shall continue in full force and
       effect without said provision.

T.     Entire  Agreement.  This Agreement  represents the entire agreement and
       understanding  between the Company and Employee  concerning  Employee's
       separation  from the Company,  and  supersedes and replaces any and all
       prior agreements and understandings  concerning Employee's relationship
       with  the  Company  and his  compensation  by the  Company,  except  as
       otherwise stated herein.

U.     No Oral Modification.  This Agreement may only be amended in writing 
       signed by Employee and the President of the Company.

V.     Effective  Date.  This Agreement is effective  seven days after it has 
       been signed by both Parties and shall terminate on December 15, 2001.

W.     Counterparts.  This  Agreement  may be executed in  counterparts,  and 
       each counterpart  shall have the same force and effect as an original  
       and shall constitute  an  effective,  binding  agreement  on the  part of
       each of theundersigned.

X.     Voluntary   Execution  of   Agreement.   This   Agreement  is  executed
       voluntarily  and without any duress or undue  influence  on the part or
       behalf of the Parties  hereto,  with the full intent of  releasing  all
       claims. The Parties acknowledge that:

         1.    They have read this Agreement;

         2.       They have been  represented in the  preparation,  negotiation,
                  and execution of this  Agreement by legal counsel of their own
                  choice  or that they have  voluntarily  declined  to seek such
                  counsel;

         3. They understand the terms and  consequences of this Agreement and of
the releases it contains;

         4.  They are  fully  aware of the  legal  and  binding  effect  of this
Agreement.


                                       6
<PAGE>
                                                       Exhibit 10.25 (continued)


IN WITNESS  WHEREOF,  the Parties have executed this Agreement on the respective
dates set forth below.



August 7, 1998       For Company:                  /s/ Guido DiGregorio
                                         --------------------------------------
                                               Guido DiGregorio, President

August 7, 1998       Employee:                         /s/ James Dao
                                         --------------------------------------
                                                        James Dao


                                       7
<PAGE>

                                                                   Exhibit 10.26

                   SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT


        This Software Development and License Agreement ("Agreement") is entered
into this 04 day of December 1998, by and between Ericsson Mobile Communications
AB, a corporation  organized and existing under the laws of Sweden  (hereinafter
"ERICSSON"), and Communication Intelligence Corporation, a corporation organized
and existing under the laws of the State of Delaware (hereinafter "LICENSOR").

                                   WITNESSETH:

        WHEREAS,  LICENSOR  desires to grant to ERICSSON and ERICSSON desires to
acquire  from  LICENSOR  nonexclusive  right(s)  and  license(s)  to use,  copy,
reproduce,  sell or otherwise  distribute  certain  software  programs under the
terms and conditions set forth in this Agreement; and

     WHEREAS,  ERICSSON  is desirous of  retaining  LICENSOR to perform  certain
services as described in this Agreement; and


        WHEREAS, LICENSOR desires to provide the rights and licenses and perform
the services  described  herein in accordance  with the terms and  conditions of
this Agreement.

        NOW, THEREFORE, ERICSSON and LICENSOR hereby agree as follows:


                            Attachments
                        Appendix A           Description of Licensed Programs
                        Appendix B           License Fee Schedule
                        Appendix C           NRE Specifications

1.      Definitions

a.      Licensed Programs shall mean:
               Jot;
               OnScreen Keyboard;
               Quick Notes; and
               Sign-it software

               in Executable Code form, as described in APPENDIX A.

b. Documentation shall mean all instructions and end-user  information needed to
fully implement and utilize the Licensed Programs. c. Executable Code shall mean
the electronic machine-readable form of the Licensed Programs.

d.                Source   Code  shall  mean  the   original,   human   readable
                  instructions used to produce  Executable Code by,  compilation
                  or assembly process.

e.      Party shall mean ERICSSON or LICENSOR, as identified above.

f.      Project shall mean the performance of services to develop the Licensed

                                       1
<PAGE>
                                                       Exhibit 10.26 (continued)

g. Programs and Documentation  and/or modify the Licensed Programs for operation
on specified ERICSSON hardware platforms.

h. Proprietary Information shall mean information,  including data and know-how,
which is:

     1) the  proprietary  property of one of the Parties  which is not developed
        under this Agreement; and

     2)  disclosed  or  transmitted  by  ERICSSON  to LICENSOR or by LICENSOR to
         ERICSSON in relation to, or in connection with this Agreement; and

     3) not within one of the exceptions of Paragraph c of Section 9 hereof.


2.      Term

         The initial term of this Agreement shall be for [Confidential  Material
provided  separately to the SEC] commencing on the date set forth above, and and
[Confidential  Material provided  separately to the SEC] or any renewal term, of
it's intent not to renew; or until termination pursuant to Sections 3 or 4.

3.      Termination

         a. In General.  This  Agreement  may be terminated by either Party upon
written notice if the other Party breaches any material term or condition of the
Agreement and such breach  remains  uncorrected  for thirty (30) days  following
written notice from the non-breaching party specifying the breach.

         b. Failure to Meet  Milestone or Delivery.  Either party may  terminate
this Agreement  immediately  upon notice to the other party at any time that the
other party fails to meet a mutually agreed upon milestone or deliver an item as
provided by  APPENDIX C within ten (10) days of the date set for such  milestone
or deliverable  item, or at the offended  parties  option,  the party failing to
meet such milestone  agrees to pay the offended party a penalty of [Confidential
Material  provided  separately  to the  SEC]  paid or  payable  by  ERICSSON  in
satisfaction of such milestone or deliverable  item. To the extent that LICENSOR
is unable to deliver acceptable  Licensed Programs and Documentation  under this
Agreement  to  ERICSSON,  LICENSOR  agrees to  [Confidential  Material  provided
separately to the SEC].

c.  Obligations  Upon  Termination.  Upon  termination of this Agreement for any
reason, the parties shall have no further  obligations  pursuant to the terms of
the agreement  except Sections 8, 9, 10, 19 and 20 shall survive any termination
or expiration of this Agreement.

d.  Continuance of Licenses.  All licenses for which ERICSSON has fully paid all
royalties   under  this  Agreement   shall  continue  after  any  expiration  or
termination of this Agreement for any reason.

4.      Development of Licensed Programs and Documentation

         a. In General.  In  consideration of the fees described in Section 5 of
this  Agreement,  LICENSOR  will  develop and deliver to ERICSSON  the  Licensed
Programs  according to the development  specifications  set forth in APPENDIX C,
including all necessary  Documentation  as required by ERICSSON.  LICENSOR shall
meet with ERICSSON monthly, or more often if requested by ERICSSON,

                                       2
<PAGE>
                                                       Exhibit 10.26 (continued)

   to discuss and report on the progress on the Project. Time for attending such
meetings shall be billed at [Confidential  Material  provided  separately to the
SEC] plus travel and living expenses.

         b.  Technical  Design.  To the  extent not  specified  in  APPENDIX  C,
LICENSOR  shall  provide  hardware  and  software  specifications,   performance
specifications,  a narrative description of the Licensed Programs, a description
of  all  input  data  (such  as  type,  size,  range  of  expected  values,  and
relationship  to  other  data),  a  description  and  pictures  of all  screens,
including sequence diagrams, and definitions and descriptions of all outputs and
reports to be generated and the process for generating them.

         c.  Acceptance.  LICENSOR  shall deliver the final  completed  Licensed
Programs  and  Documentation  to  ERICSSON no later than the date  specified  in
APPENDIX  C for  delivery  of the  "Golden  Master",  and  ERICSSON  shall  have
[Confidential  Material  provided  separately to the SEC] thereafter in which to
accept or reject the  delivered  materials in writing.  If ERICSSON  rejects the
Licensed  Programs  and  Documentation,  ERICSSON  shall  specify in writing its
grounds  for  rejection  and  LICENSOR  shall use its best  efforts  to make the
Licensed Programs and Documentation  conform to the  specifications  provided by
ERICSSON as soon as possible. LICENSOR shall continue to use its best efforts to
make the Licensed Programs and Documentation conform to the specifications until
ERICSSON  accepts the Licensed  Programs and  Documentation  or terminates  this
Agreement upon written notice to LICENSOR.

         d. Training.  LICENSOR  shall provide  ERICSSON with training on use of
the Licensed  Programs,  as requested by ERICSSON.  Such training will be billed
[Confidential  Material  provided  separately to the SEC] plus travel and living
expenses.

         e. Integration Support.  LICENSOR shall provide ERICSSON with technical
assistance   for  testing  and   integration   of  the  Licensed   Programs  and
Documentation  into  ERICSSON's  end user  products.  Such  assistance  shall be
rendered at the request of ERICSSON at ERICSSON's  facility in Research Triangle
Park, North Carolina,  USA or Manchester,  England.  Integration support will be
billed at [Confidential Material provided separately to the SEC] plus travel and
living expenses.

         f.  Maintenance  and  Support.  During the warranty  period  defined in
Paragraph 19, below, LICENSOR shall perform remedial and preventive  maintenance
and  support  for the  Licensed  Programs  after  their  acceptance  so that the
Licensed  Programs  continue to perform in  accordance  with the  specification.
LICENSOR shall provide telephone support, including dial-up support, between the
hours of 8:00 a.m. and 5:00 p.m.,  U.S.  Eastern Time,  Monday  through  Friday,
excluding  federal  holidays  or at such  other  times  or time  zones as may be
requested by ERICSSON from time to time. LICENSOR shall also provide maintenance
and support as  requested  by ERICSSON  for each product line using the Licensed
Programs.  ERICSSON  and  LICENSOR  shall  negotiate  the  terms  and  price  of
maintenance  and support  services  following  the  conclusion  of the  warranty
period, provided that such maintenance and support services shall be provided on
at least the following terms:

     1) LICENSOR shall provide telephonic,  email, fax, phone and onsite support
        to ERICSSON on a time and materials basis.

     2) At  ERICSSON's  option,  ERICSSON  may  purchase  up to  [Confidential
        Material provided  separately to the SEC] of support for [Confidential
        Material  provided  separately to the SEC] with additional time billed
        on an hourly basis at [Confidential  Material  provided  separately to
        the SEC]  per hour for  remote  and  [Confidential  Material  provided
        separately  to the SEC] for onsite  support,  plus  actual  reasonable
        travel and living expenses.

4)  ERICSSON  shall have the right to  terminate  such  maintenance  and support
    services at any time upon thirty (30) days written notice to LICENSOR.
 

                                       3
<PAGE>
                                                       Exhibit 10.26 (continued)
5.      Fees

         a.    Development Fees.

     1) Amount and Dates.  ERICSSON shall pay LICENSOR development fees upon the
events and in the amounts set forth in APPENDIX C.

     2)  Reports.   LICENSOR  shall  deliver  to  ERICSSON  monthly  reports  of
LICENSOR's   progress  on  the  Project  and  LICENSOR's  expenses  incurred  in
connection  with the Project.  Such reports shall be due on the fifteenth day of
each month for the prior month.  Each report shall contain a description  of the
current status of the Licensed Programs and Documentation, the time spent on the
Project by each  employee  of  LICENSOR,  the tasks on which it was  spent,  the
estimated  progress to be made in the next month, and the problems  encountered,
the proposed  solutions to them and their effect,  if any, on the  milestones or
Deliverables.

        b.     License Fees.

               1) In  General.  In  consideration  of  the  license  granted  by
LICENSOR under this Agreement, ERICSSON shall pay LICENSOR a fee as set forth in
APPENDIX B (the "License Fee").

               2)   Payment Terms.  Each installment of the License Fee shall be
                    due and payable in accordance with the payment  schedule set
                    forth in APPENDIX B.

6.      License Grant

        In  consideration  of payment to be made by  ERICSSON to LICENSOR of the
License  Fee(s) set forth above,  LICENSOR  hereby grants and agrees to grant to
ERICSSON a  worldwide,  non-exclusive  license to use,  copy,  incorporate  into
products to be sold, sell or otherwise distribute the Licensed Programs together
with the  Ericsson  product  platforms  identified  on APPENDIX A. No rights are
granted with respect to any Source Code.

         The rights  granted  herein shall  extend to all  ERICSSON  components,
subsidiaries,   affiliates  and  joint-venture  partners  worldwide,  which  are
majority controlled by Telefonaktiebolaget  LM Ericsson. In particular,  but not
by way of limitation, the rights granted herein shall extend to Ericsson Inc., a
Delaware  corporation,  having an address at 7001  Development  Drive,  Research
Triangle Park, NC 27709.

7.      Change of Scope

         At any time during the term of this  Agreement,  should ERICSSON desire
LICENSOR to provide any additional  services in the form of a modification of or
a change to the Project, for example, should ERICSSON

desire to have the Licensed  Programs  modified for  operation  with a different
hardware platform, LICENSOR and ERICSSON shall comply with the following:

         a. Submission of Request.  ERICSSON shall submit to LICENSOR in writing
all requests by ERICSSON for any such  additional  services which alter,  amend,
enhance,  add to,  or  delete  from the  Project  and/or  time  and/or  place of
performance  (hereinafter  referred  to  as  "Modification/Change   Request"  or
"Request").

          b.   Acceptance    Procedure.     LICENSOR    will    evaluate    such
               Modification/Change  Request at no additional  charge to ERICSSON
               as soon as  possible  but not later  than ten (10)  working  days
               following

                                       4
<PAGE>
                                                       Exhibit 10.26 (continued)

LICENSOR's  receipt of the Request.  LICENSOR's written response shall include a
statement of the availability of LICENSOR's personnel and resources, the impact,
if any,  on the  completion  date and the change in costs,  if any.  The Parties
agree to  negotiate  the  charges  for any such  changes in good  faith.  Should
ERICSSON elect to authorize such Request, ERICSSON will, as soon as possible but
not  later  than ten (10)  working  days,  authorize  LICENSOR  to  perform  the
requested Modification/Change Request by returning a duly authorized copy of the
Request to LICENSOR.

         c.   Performance.   Upon  such   authorization   by   ERICSSON  of  the
Modification/Change  Request,  LICENSOR will commence  performance in accordance
with such Request  immediately.  LICENSOR  shall not be obligated to perform any
additional  services in advance of written  authorization from ERICSSON.  In the
event   that   LICENSOR   commits    resources   to   the   performance   of   a
Modification/Change  Request without such prior written authorization,  it shall
be presumed that  performance of such  Modification/Change  Request will have no
effect on the completion date.

         d.  Binding  Agreement.  For  the  purposes  of  this  Agreement,  each
Modification/Change Request duly authorized in writing by ERICSSON and agreed to
by LICENSOR  shall be deemed  incorporated  into and part of this  Agreement and
each  such  Request  shall  constitute  a  formal  amendment  to this  Agreement
adjusting  fees and completion  date as finally agreed upon for each  authorized
Modification/Change  Request.  In no event shall the services be deemed altered,
amended, enhanced, or otherwise modified except through written authorization by
ERICSSON of a  Modification/Change  Request and  acceptance by LICENSOR,  all in
accordance with this Section 7.

8.      Ownership of Licensed Programs and Intellectual Property Rights

        LICENSOR  shall retain title and ownership of the Licensed  Programs and
all  Intellectual  Property Rights therein except as otherwise  provided in this
Agreement or agreed between the Parties.


9.      Confidentiality

     a.  All  ERICSSON  Proprietary  Information  and all  LICENSOR  Proprietary
Information  disclosed  under this  Agreement that is proprietary to one or both
Parties,  in tangible  form  (including,  but not limited  to,  printed  matter,
computer software,  models,  specimens and the like) shall be clearly identified
at the time of disclosure as being Proprietary Information by an appropriate and
conspicuous  legend,  marking,  stamp or other  positive  identification  and if
disclosed  in oral or visual  form,  shall be  identified  as being  Proprietary
Information at the time of disclosure or observation,  and shall be confirmed as
such in writing by the  disclosing  Party to the  receiving  Party within thirty
(30) days after such oral or visual disclosure.

     b. For the term of this Agreement,  and for [Confidential Material provided
separately to the SEC] thereafter a Party receiving another Party's  Proprietary
Information shall: a) handle, safeguard and protect such Proprietary Information
from  unauthorized or accidental  disclosure or unauthorized use by the exercise
of the same degree of care,  but not less than  reasonable  care,  as it employs
with  respect to  information  of its own of a similar  nature which it does not
desire to be published,  obtained or  disseminated;  b) not use such Proprietary
Information for purposes other than those provided for under this Agreement;  c)
not  reproduce  such  Proprietary  Information,  in whole  or in  part,  without
identifying such whole or partial reproduction as being Proprietary  Information
of the disclosing Party; and d) not, without

                                       5
<PAGE>
                                                       Exhibit 10.26 (continued)

the prior  written  permission  of the  disclosing  Party,  furnish or otherwise
disclose such  Proprietary  Information to any third party,  nor to employees of
the  receiving  Party  not  having  a  "need-to-know"  of  same  except  in  the
furtherance of the purposes of this  Agreement or as otherwise  provided in this
Agreement.

             c.   Information   shall  not  be  considered  to  be   Proprietary
Information,  and the recipient  shall not be liable for the use and  disclosure
thereof, if such information:

          (1)  as shown by  written  records,  was  known  or  available  to the
               receiving Party prior to receipt from the disclosing Party; or

          (2)  becomes  known or available to the  receiving  Party from sources
               other  than  the  disclosing  Party  without  restrictions  as to
               disclosure or use of the kind provided for by this  Agreement and
               otherwise than as a consequence  of breach of  obligations  under
               this Agreement; or

          (3)  as shown by written records,  is  independently  developed by the
               receiving Party; or

          (4)  is or becomes part of the general public  knowledge or literature
               otherwise than as a consequence  of breach of  obligations  under
               this Agreement; or

          (5)  is provided  by the  disclosing  Party to a third  party  without
               restrictions  as to disclosure or use of the kind provided for by
               this Agreement; or

          (6)  is  disclosed   pursuant  to  judicial  action  and  no  suitable
               protective order, or equivalent, is available.

               d.   No information  disclosed under this  Agreement,  other than
                    Proprietary  Information  shall be  considered  to have been
                    submitted  under  restriction  and the  recipient may freely
                    disclose and use any such information  without obligation to
                    the  disclosing  Party,  except as may be  created  by valid
                    patents owned by the disclosing Party.

               e.   The  parties  hereto  agree  that the terms  and  conditions
                    contained  in this  Agreement  shall not be disclosed to any
                    third  party,  without  the  concurrence  of the other party
                    hereto.

               f.   Proprietary  Information disclosed by one Party to the other
                    Party under this Agreement  shall remain the property of the
                    disclosing Party.

               g.   The  disclosing  Party agrees to grant and does hereby grant
                    to the other Party a  non-exclusive,  royalty-free  right to
                    use Proprietary  Information  disclosed in conjunction  with
                    this  Agreement,  and  practice any Patents  based  thereon,
                    solely  within the  receiving  Party's  own  facilities  and
                    thefacilities of its Subsidiaries, solely for fulfilling the
                    purposes of this Agreement and only for the duration of this
                    Agreement, except as otherwise provided in this Agreement.


10.     Indemnification and Limitation of Liability

a.      [Confidential Material provided separately to the SEC]

                                       6
<PAGE>
                                                       Exhibit 10.26 (continued)

        b. ERICSSON agrees to hold LICENSOR harmless from and indemnify LICENSOR
against any and all liabilities,  demands, expenses or damages arising out of or
resulting from (1) the  manufacture,  use or sale of any products or services by
ERICSSON  other than  products  containing  the  Licensed  Programs,  or (2) any
alteration  or  modification  of the Licensed  Programs by ERICSSON  without the
consent of LICENSOR.

        c. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL,  INCIDENTAL  OR
CONSEQUENTIAL  DAMAGES, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.

        d. The  provisions  of this  Section 10  relating  to  limitation  of or
protection  against  liability  shall  apply  regardless  of fault (of  whatever
degree) and to the full extent permitted by law.

11.     Independent contractor

         LICENSOR  is and shall at all times be an  independent  contractor  and
shall not be deemed an employee or agent of ERICSSON.  Nothing in this Agreement
is  intended  to  constitute,  create,  give  effect  to or  otherwise  imply  a
partnership,  joint venture or other business  organization  of any kind between
the parties. Neither Party has any authority to bind the other.

12.     Other Agreements

        This Agreement,  including  Appendices,  contains the complete agreement
between the parties and shall,  as of the effective  date hereof,  supersede all
other agreements  between the parties relating to the Project and development of
the Licensed Programs and  Documentation.  The parties stipulate that neither of
them has made any  representation  with  respect to the  subject  matter of this
Agreement or the execution and delivery  hereof except such  representations  as
are specifically set forth herein.  Each of the parties hereto acknowledges that
they have  relied on their own  judgment in entering  into this  Agreement.  The
terms and conditions of the Appendices are incorporated herein by reference.  To
the extent that there is any conflict  between the terms and  conditions  of the
Appendices and this Agreement, the provisions of this Agreement shall control


13.     Modification of Agreement

         No  waiver  or  modification  of  this  Agreement  or of any  covenant,
condition,  or limitation  herein contained shall be valid unless in writing and
duly executed by both parties, and no evidence of any waiver or modification

shall be offered or  received in evidence  in any  proceeding,  arbitration,  or
litigation  between  the  parties  hereto  arising  out  of  or  affecting  this
Agreement,  or the rights or obligations of the parties  hereunder,  unless such
waiver or  modification  is in writing and duly  executed by both  parties.  The
parties  further  agree that the  provisions  of this  Section may not be waived
except as herein set forth.

14.     Forbearance--No Waiver

         Any failure by either  Party to enforce any of the  provisions  of this
AGREEMENT or to require at any time performance by the other party of any of the
provisions hereof,  shall in no way affect the validity of this AGREEMENT or any
part hereof, or the right of either Party thereafter to enforce each and every

                                       7
<PAGE>

                                                       Exhibit 10.26 (continued)

such provision.

15.     Choice of Law

         It is the intention of the parties  hereto that this  Agreement and the
performance  hereunder  and all  suits  and  special  proceedings  hereunder  be
construed  in  accordance  with and  pursuant  to the laws of the State of North
Carolina.

16.     Agreement Binding on Successors

         This  Agreement  shall inure to the benefit of and be binding  upon the
successors and permitted assigns of the respective parties.

17.     Assignment Restricted

         LICENSOR may not assign this  Agreement in whole or in part without the
written  consent of the other party,  provided  that  LICENSOR may contract with
other parties to provide services  hereunder subject to ERICSSON's prior written
approval. ERICSSON may not assign this Agreement in whole or in part without the
consent of  LICENSOR,  except that  ERICSSON  may assign this  agreement  to any
parent, subsidiary, affiliate or joint venturer, which is majority controlled by
Telefonaktiebolaget  LM  Ericsson,  with  ERICSSON  that  agrees to  assume  all
obligations and liabilities of ERICSSON hereunder.

18.     Notices

All notices, demands, or requests provided for or permitted to be given pursuant
to this Agreement must be in writing.  All notices,  demands, and requests to be
sent to a party hereunder  pursuant hereto shall be deemed to have been properly
given or served by depositing  the same in the United States mail,  addressed to
such party, postage prepaid, and certified with return receipt requested, at the
address  set forth below or at such other  address as any party shall  hereafter
furnish to the others in writing:

        LICENSOR:     Communication Intelligence Corporation
                      275 Shoreline Drive
                      Suite 520
                      Redwood Shores, CA 94065
                      Attn: Mike Sullivan

                           With a copy to:



                     Communication Intelligence Corporation
                     275 Shoreline Drive
                     Suite 520
                     Redwood Shores, CA 94065
                     Attn: Legal Department


                                       8
<PAGE>

                                                       Exhibit 10.26 (continued)


        ERICSSON:     Ericsson Mobile Communications AB
                      c/o Program Administrator, RTP
                      Ericsson Inc.
                      7001 Development Drive
                      Research Triangle Park NC 27709
                      Attn: Lynn Canada

                      with a copy to:

                      Ericsson Inc.
                      7001 Development Drive
                      Research Triangle Park NC 27709
                      Attn: Legal Department

19.     Warranty

         a. In General. LICENSOR warrants that the services will be performed in
a workmanlike  manner and that for a period of [Confidential  Material  provided
separately  to the SEC] days  following  ERICSSON's  acceptance  of the Licensed
Program,  the Licensed  Programs  will perform  according to the  specifications
agreed  upon by  LICENSOR  and  ERICSSON.  LICENSOR  will  repair or replace the
Licensed Programs during such [Confidential  Material provided separately to the
SEC] days as soon as possible after ERICSSON  informs  LICENSOR of any breach of
this warranty.

        b. Ownership and Authority.  LICENSOR represents and warrants that it is
the sole owner of the Licensed  Programs,  or has procured the Licensed Programs
under valid licenses from the owners thereof,  and LICENSOR  further  represents
and warrants  that it has full power and  authority  to grant the rights  herein
granted without the consent of any other person.

c. Code Integrity. LICENSOR warrants that Licensed Programs contain no "computer
viruses,"  "time bombs" or "Easter eggs" as those terms are commonly  understood
in the information processing industry. Specifically, LICENSOR warrants that the
Licensed  Programs  contain  no  code or  instructions  (including  any  code or
instructions  provided  by third  parties)  that may be used to access,  modify,
delete,  damage,  or  disable  any  computer,   associated  equipment,  computer
programs,  data files or other electronically stored information.  Except as may
otherwise be expressly  provided in this Agreement,  LICENSOR  hereby  expressly
waives  and  disclaims  any  right or  remedy it may have at law or in equity to
de-install, disable or repossess any Licensed Programs.

d.  Documentation.  Any  Documentation  furnished  with  the  Licensed  Programs
hereunder  will be in form and substance at least equal to comparable  materials
generally in use in the industry. If at any time such original  Documentation is
revised or supplemented by additional  documentation,  thereupon  LICENSOR shall
deliver to ERICSSON  copies of such revised or  additional  documentation  at no
charge in quantity equivalent to the

quantity of such original Documentation then in ERICSSON's possession.  ERICSSON
shall have the right to reproduce all documentation supplied hereunder.

e. Exclusions. This warranty excludes any claims based on defects in the License
Programs and Documentation caused by ERICSSON,  other parties beyond the control
of LICENSOR, or the hardware.  EXCEPT AS PROVIDED IN SUBSECTION 18. ABOVE, THERE
ARE NO  EXPRESS OR IMPLIED  WARRANTIES,  INCLUDING  THE  IMPLIED  WARRANTIES  OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, RESPECTING THIS AGREEMENT.

                                       9
<PAGE>

                                                       Exhibit 10.26 (continued)

f. All Licensed Programs deliverable by LICENSOR hereunder containing or calling
on a calendar function including,  without  limitation,  any function indexed to
the CPU clock, and any function providing specific dates or days, or calculating
spans of dates or days  (collectively,  "Time-Keyed  Software"),  shall  record,
store, process, provide and, where appropriate,  insert, true and accurate dates
and calculations for dates and spans including and following January 1, 2000. As
part of its  maintenance  obligations,  LICENSOR  shall consult with ERICSSON to
assure that Licensed Programs will (i) have no lesser functionality with respect
to data containing dates both, or either,  before or after January 1, 2000, than
heretofore  with  respect  to  dates  prior  to  January  1,  2000  and  (ii) be
interoperable  with other  software used by ERICSSON  which may deliver data to,
receive data from or otherwise interact with Licensed Programs.

g. All software heretofore provided or specified to ERICSSON by LICENSOR whether
hereunder or under  separate  agreement,  if not  currently  capable of using or
rendering date- or  time-sensitive  data or supporting  interoperability  in the
manner  described in subsection e above, but still under  maintenance,  shall be
modified or replaced by LICENSOR  with  software  which  provides  all  existing
functionality  and is so  capable,  by a date no later  than  January  1,  2000,
without incremental charge therefor.


20.     Marketing

a. ERICSSON  shall have the right to brand one or more of the  following  with a
trademark or slogan of LICENSOR which is acceptable to ERICSSON:

i)      Data Sheets
ii)     Advertising
iii)    Product Packaging
iv)     Owner's Manuals

         In any such use, ERICSSON shall clearly indicate  LICENSEE's  ownership
of its trademarks.  ERICSSON shall display LICENSOR's  trademarks in conformance
with LICENSOR's  reasonable  instructions  from time to time,  provided that the
font type, size, color, placement and other aesthetic aspects shall at all times
be subject to the reasonable approval of ERICSSON.  LICENSOR shall indemnify and
hold ERICSSON  harmless  against and shall handle and defend  against any claim,
suit, or other  proceeding  brought against ERICSSON based on an allegation that
the use of LICENSOR's trademarks  constitutes a violation or infringement of any
trademark, service mark, trade name, or other proprietary information right.

b. All press releases of a Party which mention the other Party or this Agreement
must be reviewed and approved by the other Party.

c. ERICSSON  shall,  at  LICENSOR's  request,  provide  samples of  literature,
packaging  andadvertising  materials  bearing  LICENSOR's  trademarks.  ERICSSON
agrees to maintain the high level of quality accorded  products  associated with
and  marketed by  LICENSOR.  ERICSSON  shall not remove,  obliterate  or conceal
copyright or patent notices included in the Licensed Programs and Documentation.

d. Except as expressly provided herein, neither Party is granted any right in or
license to use any trademark or service mark of the other Party.

21.     Enforceability

        If any  term  or  provision  of  this  Agreement  shall  be  invalid  or
unenforceable,  the remainder of this Agreement  shall not be affected;  and the
remainder  of this  Agreement  shall  be valid  and  enforceable  to the  extent
permitted by

                                       10
<PAGE>

                                                       Exhibit 10.26 (continued)

applicable  law. In addition,  the parties shall in good faith endeavor to reach
agreement on a provision to replace the invalid  provision  which,  as nearly as
possible, will reflect the intent of the original provision.


         IN  WITNESS  WHEREOF,  each  of the  Parties  hereto  has  caused  this
AGREEMENT  to be  executed  in  duplicate  originals  by their  respective  duly
authorized officers or representatives.


Ericsson Mobile Communications AB       Communication Intelligence Corporation

By:     /s/Joakin Ingers                 By:     /s/Guido DiGregorio

Title:  Director Data Development        Title:  President

Print Name:    Joakin Ingers             Print Name:    Guido DiGregorio

Date:   November 30, 1998                Date:   December 4, 1998
     -------------------------------          -------------------


                                       11
<PAGE>

                                                       Exhibit 10.26 (continued)

                                   APPENDIX A

                            CIC Product Descriptions

1.      JOT

a)   Jot  is a  natural  character  set  handwriting  recognition  system  which
     supports  US English and  accented  Roman  characters.  The  patented  user
     interface  utilizes a  segmented  input  panel  which is  divided  into two
     regions and can be used in a box mode or full screen mode.

b)   The Jot  trainer  allows user tuning of  character  recognition  to improve
     recognition  accuracy.  c) The Jot animated  tutorial  demonstrates  how to
     write the full  character  set. d) The Jot Macro Editor  allows the user to
     define  frequently  used  phrases or  actions  for  quicker  text entry and
     editing.


2.      On-screen Keyboard

     The software  on-screen keyboard is an application that emulates a hardware
     keyboard  on the  screen.  The  user  can  touch  characters  on it and the
     characters are posted to the application  that has focus. The keyboard will
     support   accented  Roman  characters   currently   available  in  the  Jot
     recognizer.


3.      Quick Notes

     QuickNotes  is  an  electronic  notetaking  and  ink  capture  application.
     QuickNotes incorporates CIC's patented INKshrINK compression technology for
     reducing  the  size of the note or  drawing  to a  fraction  of the size of
     standard graphical file formats (i.e.- bmp, gif or jpg).

4.      Sign-It (login)

     Sign-it is a dynamic signature verification software which will utilize the
     login  API so that the  users  signature  can be used for  login  security.
     Sign-it includes CIC's SigCheck(TM)  handwritten signature verification and
     InkSentry(TM) data encryption algorithms. For use outside the United States
     a 40bit version of the encryption algorithms will be included.


                                       12
<PAGE>
                                                       Exhibit 10.26 (continued)



                                  "Appendix B"
                              License Fee Schedule


Per unit Royalties shall be as follows:

                Jot  [Confidential Material supplied separately to the SEC]
 On-Screen Keyboard  [Confidential  Material supplied  separately to the SEC]
       Quick  Notes  [Confidential  Material  supplied separately to the SEC]
      Sign-IT Login  [Confidential Material supplied separately to the SEC]


Licensee  shall pay a  non-refundable  fee of  [Confidential  Material  supplied
separately to the SEC],  due at contract  signing,  for  [Confidential  Material
supplied  separately to the SEC] Jot & On-Screen  Keyboard  Units.  Ericsson can
debit  against these  prepaid  credit units in  accordance  with the terms below
and/or any [Confidential  Material  supplied  separately to the SEC] platform as
determined by Ericsson internal management with notice to CIC.

[Confidential Material supplied separately to the SEC]

                                       13
<PAGE>

                                                                   Exhibit 10.26
--------------------- ------------------ ------------------ --------------------
CIC Confidential                                               November 19, 1998
--------------------- ------------------ ------------------ --------------------
                                                             READ 1998:17429



                                  "Appendix C"



Non-Recurring Engineering (NRE) Specifications


               Port CIC Pen Products to Pamela & Roxette Platforms








                                                                      Rev 2.7





                                       1
<PAGE>


                                                                   Exhibit 10.26
--------------------- ------------------ ------------------ --------------------
CIC Confidential                                             November 19, 1998
--------------------- ------------------ ------------------ --------------------
                                                            READ 1998:17429


Non-Recurring Engineering (NRE) Effort


                                 I. Introduction


This Scope of Work is  intended  to provide  the  framework  for porting key CIC
products  to  Ericsson's  Pamela  and  Roxette  platforms.  An  overview  of the
activities are included in the table below.

--------------------  ---------------------      -----------------------
CIC Product            Pamela [Confidential       Roxette [Confidential
                       Material supplied          Material supplied
                       separately to the SEC]     separately to the SEC]
--------------------   --------------------       ----------------------
JotTM                           X                            X
On-screen Keyboard              X                            X
Word Jot (code name)            X
QuickNotes                      X
SignIt - Login                  X
--------------------   --------------------        ---------------------

Porting to the [Confidential  Material supplied separately to the SEC] operating
system will be common to both  Ericsson  products.  Final porting and testing of
JotTM will be specific to each  platform  due the use of  different  processors,
screen sizes and user interfaces. Further, QuickNotes and SignIt (Login) will be
ported specifically to Pamela.

Under this proposal, CIC will work with Ericsson, and it's partners, to port the
above products to Ericsson's Pamela and Roxette. Smart Phone products,  focusing
on user interface,  recognition and input mechanisms.  Ericsson's responsibility
is the  general  structure  of the  product  around the  [Confidential  Material
supplied separately to the SEC] software layering and low level driver elements.
In the case of JotTM,  , it will post  characters to the  application  area as a
keyboard  would.  It is  assumed  that CIC will  work in close  connection  with
Ericsson,  Symbian and its other partners in this effort, in definition,  design
and implementation of these elements.

Software objects developed under this agreement,  which contain  proprietary CIC
technology (i.e. user interface,  character  recognition and input  mechanisms),
will be owned  exclusively  by CIC and shall be considered  part of the Licensed
Programs per Appendix B.

                                       2
<PAGE>
--------------------- ------------------ ------------------ --------------------
CIC Confidential                                             November 19, 1998
--------------------- ------------------ ------------------ --------------------
                                                            READ 1998:17429




II.   Core Deliverables from CIC

1.      Jot(TM)

a)   Provide JotTM recognition engine and patented user interface  capability to
     the  [Confidential  Material  supplied  separately to the SEC]  application
     environment.  Supported character sets  are[Confidential  Material supplied
     separately to the SEC]. The assumed user interface  model is  [Confidential
     Material  supplied  separately  to the SEC]  with  all Jot  user  interface
     elements (i.e.
     mode marks, relevant user interface labels) implemented in software.
b)   [Confidential  Material  supplied  separately  to  the  SEC]-based  Jot(TM)
     trainer  application,   to  allow  user  tuning  of  character  recognition
     optimized for each of Ericsson's Pamela & Roxette products.
c)   [Confidential  Material  supplied  separately  to  the  SEC]-based  Jot(TM)
     animated tutorial, with interface optimized for each of Ericsson's Pamela &
     Roxette products.
d)   [Confidential  Material supplied separately to the SEC]-based Macro Editor,
     with interface optimized for each of Ericsson's Pamela & Roxette products.


2.      On-screen Keyboard

     The software  on-screen keyboard is an application that emulates a hardware
     keyboard  on the  screen.  The  user  can  touch  characters  on it and the
     characters  are  posted  to the  application  that is  having  focus.  This
     proposal   addresses   porting  of  CIC's  standard   on-screen   keyboard.
     Customization  of user interface and character sets may require  additional
     development  and  charges  determined  by a mutually  agreeable  functional
     specification.

3.      [Confidential Material supplied separately to the SEC] Jot (Code name)

         Provide same Jot  functionality  as in "1." above.  CIC will provide an
         additional  mode to the  standard  Jot  interface  that  will  allow it
         to[Confidential  Material supplied separately to the SEC].  Recognition
         and the posting of characters  may proceed in parallel.  The details of
         the metaphor will be mutually defined by CIC and Ericsson,  however, it
         will  essentially   provide  for  a  [Confidential   Material  supplied
         separately to the SEC].


4.      Quick Notes

     CIC will port it's current  Palm-size PC note taking  application to Pamela
     and optimize  the user  interface.  It will link to existing  [Confidential
     Material supplied  separately to the SEC] and email capability.  Additional
     work  may be  required  to  link  to the  standard  [Confidential  Material
     supplied separately to the SEC] productivity applications.  Synchronization
     to the CIC QuickNotes Desktop application will be handled separately.

5.      Sign-It (login)

     CIC will port it's  current  Sign-It  product to Pamela,  optimize the user
     interface and link to the [Confidential Material supplied separately to the
     SEC] login API so that the users  signature can be used for login  security
     to the Pamela device.

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III.     Deliverables

This section  describes the deliverables for the project.  Any changes are to be
mutually agreed upon with appropriate approvals.

IIIa.   Deliverables Common to Pamela & Roxette

Alpha 0:
o Jot user interface and recognition engine implemented on[Confidential Material
supplied separately to the SEC].

IIIb.    Pamela Specific Deliverables

a.) Functional Specification:
o Design recommendations for Jot and "[Confidential Material supplied separately
to the SEC] Jot" on Pamela. o Testing plan and procedures for each Phase (Alpha,
Beta, & GMC).
o       Written CIC deliverable specifications.

b.) Alpha 1:
o      Jot with test interface and recognition engine implemented on Pamela EP1.
o      Technical support to Ericsson by fax or email for integration support.

c.) Alpha 2:
o    Jot  &  "[Confidential  Material  supplied  separately  to  the  SEC]  Jot"
     recognition engine implemented on[Confidential Material supplied separately
     to the SEC].
o       Technical support to Ericsson by fax or email for integration support.

d.) Alpha 3:
o    Quick  Notes  &  Sign-It  (login)  implemented  on  [Confidential  Material
     supplied separately to the SEC].
o    Technical support to Ericsson by fax or email for integration support.

e.) Beta:
o    Jot,[Confidential  Material  supplied  separately  to the SEC] Jot",  Macro
     Editor, Trainer and Tutorial implemented on Final.

o    Quick Note Tutorial  implemented on  Final[Confidential  Material  supplied
     separately to the SEC].


o    Sign-It implemented on  Final[Confidential  Material supplied separately to
     the SEC].

o       Sample code for testing and integration.
o       Technical support to Ericsson by fax or email for integration support.

f.) Final Integration Testing:
o    Final  integration  and testing of Jot,  "[Confidential  Material  supplied
     separately to the SEC] Jot", macro editor, and tutorial, trainer on EP2.
o     Final integration and testing of Soft Keyboard on EP2.
o     Final integration and testing of Quick Notes, Sign-It (login) on EP2.
o     Technical support to OEM by fax or email for integration support.
o     On site integration testing and support in Ericsson facilities in Raleigh,
      NC.
o     Sample code for testing and integration.
o     Software will be tested in accordance with Ericsson software standards.

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g.) Final Deliverables 
o       Golden Master Disk (Product-quality software) containing;
o       Jot user interface, recognition engine, trainer and macro editor
        implemented on EP2.
o       On-screen keyboard implemented on EP2.
o       "[Confidential Material supplied separately to the SEC] Jot" 
        implemented on EP2.
o       Quick Notes implemented on EP2.
o       Sign-It (login) Jot user interface, recognition engine, trainer and
        macro editor implemented on EP2.
o       Final Documentation including;
o       User documentation (per license agreement).
o       Final documentation of API's and software structure.


IIIc.    Roxette Specific Deliverables

a.) Functional Specification:
o       Design recommendations for Jot on Roxette.
o       Testing plan and procedures for each Phase (Alpha, Beta, & GMC).
o       Written CIC deliverable specifications.

b.) Alpha 1:
o       Jot recognition engine implemented on Roxette EP1.
o       Technical support to Ericsson by fax or email for integration support.

c.) Beta 1:
o       Jot user interface and  recognition  engine  implemented on Roxette EP2
        SDK.
o       Jot tutorial, macro editor and trainer implemented on Roxette EP2 SDK.
o       Soft Keyboard implemented on Roxette EP2 SDK.
o       Sample code for testing and integration.
o       Documentation of APIs and software structures.
o       Technical support to Ericsson by fax or email for integration support.

d.)     Final Integration Testing:
o       Final integration and testing of Jot, macro editor, trainer and 
        tutorial on EP2.
o       Final integration and testing of Soft Keyboard on EP2.
o       Technical support to OEM by fax or email for integration support.
o       On site integration testing and support in Ericsson facilities 
        in Manchester, England.
o       Sample code for testing and integration.
o       Software will be tested in accordance with Ericsson software standards.

e.) Final Deliverables 
o       Golden Master Disk (Product-quality software) containing;
o       Jot user interface, recognition engine, trainer and macro editor 
        implemented on Roxette EP2.
o       On-screen keyboard implemented on EP2.
o       Final Documentation including;
o       User documentation (per license agreement).
o       Final documentation of API's and software structure.

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IV.       Dependencies

Note:  These  dependencies  may  affect  CIC's  ability  to deliver a given
deliverable or to meet the agreed schedule milestones.

o Completion of NRE & License Agreements between CIC and Ericsson.
o Ability to get necessary development tools/information from either Ericsson or
  key vendors  (Operating System,  Processor,  etc.)
o Ericsson delivery to CIC of necessary components to simulate Pamela & Smart
  Phones Roxette (Early Prototypes and SDK's).
o Cooperation and clear definition of User Interface requirements.


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V. Pricing Estimates
(Refer to Section III. Deliverables


Task       Description                  Est Weeks                Cost
IIIa.  Common
[Confidential Material supplied separately to the SEC]


IIIb. Pamela
[Confidential Material supplied separately to the SEC]












IIIb. Roxette
[Confidential Material supplied separately to the SEC]


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[OBJECT OMITTED]

     Material Costs 

     [Confidential Material supplied separately to the SEC]

     On Site Integration and Testing Costs:

     [Confidential Material supplied separately to the SEC]

     -------------------------------- ------------------------------------------
              Item                                        Est. Cost
     -------------------------------- ------------------------------------------
     -------------------------------- ------------------------------------------
     Integration test in Raleigh, NC  [Confidential Material supplied separately
                                       to the SEC]

     -------------------------------- ------------------------------------------
     -------------------------------- ------------------------------------------
     Integration test in Manchester   [Confidential Material supplied separately
                                       to the SEC]

     -------------------------------- ------------------------------------------
     -------------------------------- ------------------------------------------
     Est. Travel & Living Expenses    [Confidential Material supplied separately
                                      to the SEC]

     -------------------------------- ------------------------------------------
     -------------------------------- ------------------------------------------
                   Est. Total         [Confidential Material supplied separately
                                      to the SEC]

     -------------------------------- ------------------------------------------

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Terms of Agreement;

o       [Confidential Material supplied separately to the SEC].
o       "Other Costs" will be billed as incurred for actual amounts.

VI.     Definitions & Acceptance Criteria

Any changes are to be mutually agreed upon with appropriate approvals.

o    Alpha Version:  Key functionality  implemented but contains known bugs that
     may  cause  fatal  errors  occasionally  (i.e.  system  hanging,   loss  of
     information).  Engine is fully  implemented and work in OEM OS emulator but
     there may be fatal errors. After CIC delivers the software,  Ericsson shall
     integrate  it to  development  board  and  verify  that it meets  the above
     performance criteria within  [Confidential  Material supplied separately to
     the SEC] weeks.  If there is no written  disagreement  after  [Confidential
     Material  supplied  separately  to the SEC]  weeks,  it is deemed  that the
     release is done.

o    Beta Version:  All components are  implemented but the software may contain
     known  bugs of minor  severity,  no known  fatal  errors.  User  Interface,
     recognition engine,  trainer, macro editor are all implemented and have the
     desired  UI and  functionality.  There may be some  minor bugs but no fatal
     errors  that  cause  system  hang or data  loss.  After  CIC  delivers  the
     software,  Ericsson  shall  integrate it to their  respective  products and
     verify  it  meets  the  above  performance  criteria  within  [Confidential
     Material  supplied  separately  to the SEC]  weeks.  If there is no written
     disagreement after  [Confidential  Material supplied separately to the SEC]
     weeks, it is deemed that the release is done.

o    Golden Master  Candidate:  The software is fully functional and contains no
     known problems.  It is ready for product  shipment.  After CIC delivers the
     software, Ericsson shall integrate it to the respective products and verify
     it  meets  the  above  performance  criteria  with  [Confidential  Material
     supplied separately to the SEC] weeks. If there is no written  disagreement
     after  [Confidential  Material supplied separately to the SEC] weeks, it is
     deemed that the release is done and the version is the final Golden  Master
     release.

In practice there may be intermediate releases for Alpha, Beta and Golden Master
Candidate versions. For example, CIC may release Alpha1, Alpha2, Beta1, Beta2 or
GMC1,  GMC2 etc, and Ericsson may give feedback for each release.  CIC continues
to fix problems until both parties agree that a release meets the above criteria
and it is deemed the final Alpha, final Beta or final GMC.

VII.         Licensed Deliverables

The following is a  description  of licensed  deliverables  to be bundled on the
respective Pamela & Roxette products;

o    JotTM  Handwriting   Recognition  engine  for  Ericsson  implementation  of
     [Confidential Material supplied separately to the SEC] based Smart Phone

o    JotTM User Interface for Ericsson  implementation of [Confidential Material
     supplied  separately  to the  SEC]  based  Smart  Phone.

o    JotTM   Trainer,   Animated   Tutorial,   and  Macro  Editor  for  Ericsson
     implementation of [Confidential  Material  supplied  separately to the SEC]
     based Smart Phone

o    Sign-ItTM

o    QuickNotesTM

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Communication Intelligence Corporation    Ericsson Commercial


By:  /s/Guido DiGregorio                   By: /s/Del Hanson
     ----------------------------------        ------------------------------
     ----------------------------------        ------------------------------

                                           Program Director
Title:   President                         Title:   SW Technology Provisioning
         ------------------------------        ------------------------------
         ------------------------------        ------------------------------


Date:    December 4, 1998                  Date:    12/1/98
         -------------------                ---------------------------------


Ericsson Roxette Technical Manager         Ericsson Pamela Technical Manager


By:      /s/Joakin Ingers                  By: /s/Danny Bravo
         -------------------------------      -------------------------------
         -------------------------------      -------------------------------


Title:   Director Data Development         Title: Sr. Project Manager
         -------------------------------          ---------------------------
         -------------------------------          ---------------------------


Date:    November 30, 1998                  Date: 12/1/98
         -------------------------------          ---------------------------

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                                                                    Exhibit 21.1

                     COMMUNICATION INTELLIGENCE CORPORATION
                            SCHEDULE OF SUBSIDIARIES


         CIC Japan Inc.

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                                                                    Exhibit 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

     We hereby  consent to the  incorporation  by reference in the  Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-04711, No.
333-24257  and  No.  333-43855)  and  the  incorporation  by  reference  in  the
Registration Statements on Form S-8 (No.33-5521,  No. 33-71614 and No. 33-92284)
of  Communication  Intelligence  Corporation  of our report dated March 29, 1999
appearing in this Form 10-K.  We also  consent to the  reference to us under the
heading "Experts" in such Prospectuses.

PricewaterhouseCoopers LLP



San Jose, California
March 29, 1999






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